POLICY DIVERGENCE IN THE GLOBAL ECONOMY

Stephen Kaplan’s book on austerity politics in Latin America is rooted in a desire to explain the wide variety of budgetary policies – ranging from austerity to spendthrift – pursued by Latin American governments within the context of the global market economy.Footnote ¹ For Kaplan (Reference Kaplan2013: 16), this variation can be explained by what he terms ‘the political austerity cycle’. Building on political business cycle theory (for example, Alesina and Roubini Reference Alesina and Roubini1992; Nordhaus Reference Nordhaus1989), Kaplan (Reference Kaplan2013: 15) argues that the likelihood of politicians in Latin America ‘swelling the public purse to gain votes’ is a combination of the financial opportunities and political motivations they face.

The financial opportunities available to Latin American governments are conditional upon their foreign debt structures; specifically, whether their debt is primarily issued by bond markets or international banks. The disjuncture between bank- or bond-based financing has, according to Kaplan, important implications for the incentives and preferences of international creditors, which will directly affect the fiscal wriggle-room of national governments. Bond markets, ironically as a consequence of a collective action problem, have no hesitation in dumping the bonds of uncooperative national governments. This has the net effect of severely curtailing the room that Latin American governments have to manoeuvre, and so Kaplan (Reference Kaplan2013: 47) argues that when ‘stimulus-minded politicians face low-funding constraints from global bond markets, they use fiscal and/or monetary policy to boost the economy, thereby giving rise to traditional business cycles’. In contrast, when stimulus-minded politicians face severe constraints from bond markets, they do not expand the public economy. Rather, as Kaplan (Reference Kaplan2013: 49) suggests, they employ a ‘neutral mix of economic policies or even contractionary policies that yield “market-induced political austerity cycles”’.

However, it is not just the relationship of Latin American governments with international bond markets that will condition the business cycle. For Kaplan, politicians are unlikely to create political business cycles without having the political will to do so. For Latin American politicians, this political motivation is primarily a product of ‘their own transformative historical experiences’ (Kaplan Reference Kaplan2013: 32) and, more specifically, whether a country has experienced hyperinflation or not. Due to the damaging distributive consequences of inflation for middle-income and poorer voters, together with the business community, the concomitant electoral cost of price instability means that politicians from inflation-scarred Latin American countries are likely to be far more risk-averse than their counterparts in other, less economically volatile countries.

Consequently, a politician in a Latin American state with a history of price volatility will not expand the public economy before an election, preferring instead to use ‘mildly contractionary policies that yield [inflation-averse] political austerity cycles’ (Kaplan Reference Kaplan2013: 67). However, a perfect storm is created when inflation-averse politicians also face steep funding constraints from global financial markets. When this happens, we witness the true political austerity cycle, where politicians ‘strongly contract economic policies to stabilize the economy’ (Kaplan Reference Kaplan2013: 68).

With compelling empirical evidence drawn from a raft of cross-national statistical tests (Chapter 3), and comparative case studies of Argentina, Chile and Venezuela,Footnote ² Kaplan provides us with a compelling account of the divergence in budgetary policy we observe across the region; an account that is sensitive not only to international financial imperatives, but also domestic political incentives.

In a remarkably similar vein, albeit from a different perspective and with a different focus, Pablo Pinto also provides a convincing account of policy divergence amid the pressures of the global economy: a divergence that again is sensitive to the interplay between domestic politics and the pressures of the global market. Pinto’s core argument (Reference Pinto2013: 6), articulated through a decision theoretic model (in Chapter 2), is that ‘host governments’ partisan alignment – whether pro-labor or pro-capital – determines whether countries are more open or closed to FDI’. Pinto argues that the distributive consequences of foreign direct investment (FDI) inflows means that parties will tailor their investment climate according to the interests of their core support base: ‘Governments will seek out investors that are likely to contribute to the well-being of the core constituents of their party or coalition’ (Pinto Reference Pinto2013: 4).Footnote ³ This means that labour-based parties are more likely to welcome foreign investment, particularly foreign investment that pushes up demand for labour, given that ‘FDI is likely to increase wages and decrease the return to capital’ (Pinto Reference Pinto2013: 12). In contrast, because of this, domestic capital owners operating in the host economy will oppose foreign direct investment inflows and therefore ‘governments catering to domestic businesses prefer restricting direct investment inflows that compete with domestic businesses in product and factor markets’ (Pinto Reference Pinto2013: 7). Therefore, the distributive consequence of foreign direct investment inflows creates a ‘political cleavage around the issue of regulating FDI’ (Pinto Reference Pinto2013: 23).

For Pinto, there is also a supply side to this story. Foreign direct investment will react to the partisanship of the government in power, which for investors, Pinto (Reference Pinto2013: 29) argues, represents a type of commitment mechanism. This means that ‘investors choose forms of production that are tailored to the specific political conditions in host countries’ (Pinto Reference Pinto2013: 4) and, given that in Pinto’s argument (Reference Pinto2013: 31) labour’s material interests are congruent to those of foreign investors, left-leaning governments should attract more foreign direct investment than right-leaning governments in any given year.

Just as Kaplan argued that divergent domestic political incentives and preferences will channel and condition the pressures of globalization on budget outcomes, so too does Pinto; except in this case, variation in the preferences of domestic political actors will interact with the preferences of foreign investors to produce divergent investment regimes. And again, just like Kaplan, Pinto provides strong support for his central argument with a rigorous cross-national empirical analysis (Chapter 4), and comparative case studies of investment regimes in Argentina and South Korea.

In this manner, both books provide an excellent riposte to the hyperbole of the convergence thesis by emphasizing that the interaction of the global economy and domestic politics will produce divergence in policy outcomes across emerging markets. This divergence is driven by the conjuncture of the preferences and incentives facing different forms of international capital together with the preferences and incentives facing domestic political actors, most notably, competing partisan interests. In many respects, both authors echo what has been a central theme in the political economy literature of the advanced industrial democracies in the last few years (for example, Oatley Reference Oatley1999), and they are not alone in suggesting that, even in the context of globalization, we can still observe divergent policy outcomes in developing democracies also. Indeed, for the Latin American region alone, others have argued that variation across countries is still a feature of government expenditure (Huber et al. Reference Huber, Mustillo and Stephens2008; Kaufman and Segura-Ubiergo Reference Kaufman and Segura-Ubiergo2001), the burden of taxation (Wibbels and Arce Reference Wibbels and Arce2003), tax revenue (Hart Reference Hart2010), privatization (Doyle Reference Doyle2010) and levels of labour regulation (Murillo Reference Murillo2005).

GLOBALIZATION CONSTRAINS POLICY AUTONOMY (IN SOME WAYS)

Of course, this is not to suggest that neither author entertains the (quite significant) pressures of increasing global economic integration. Far from it. Both books begin with the acknowledgement that the realities of the global economy have placed strictures on national governments in developing democracies, thereby limiting the policy options available to these governments. However, they do not caricature the international system as an all-powerful exogenous force driving an inevitable convergence in economic policy, as is often the case in many of the reductionist arguments of the race-to-the-bottom protagonists. On the contrary, both books, in the best tradition of Peter Gourevitch (Reference Gourevitch1978), highlight the complicated and in many ways mutually dependent, although somewhat asymmetric, relationship that exists between international economic actors, in this case, banks, bond holders and investors, and domestic political interests. Global economic actors do engender coercive pressures, but these pressures are far from homogeneous. This is a central theme of both books, and a defining strength of the arguments Kaplan and Pinto make.

For Kaplan (Reference Kaplan2013: 9), ‘what reduces policy autonomy is not the amount of financial integration, but rather the nature of creditor–debtor relations’. This relationship is conditional on whether a government’s debt comprises mostly international bank loans or bond issuance. All lenders, regardless of context, want to be repaid and ‘therefore, they endorse restrictive economic policies that ensure steady remuneration’ (Kaplan Reference Kaplan2013: 38). Their ability to ensure that such policies are implemented, however, varies considerably. When a government’s debt is primarily made up of international bank loans, given the small number of creditors, this will facilitate coordination among these banks. Ironically, it is this collective action that sows the seeds of their downfall. Rather than coercively employing this advantage, Kaplan (Reference Kaplan2013: 39) argues that international banks, to protect their own balance sheets from a severe profit shock, end up defensively lending to teetering developing world economies in order to prevent them from crashing. In turn, they insist that governments reform, but the size of their stake in the solvency of the borrower undermines their credible exit threat and they suffer from a moral hazard problem. Profligate Latin American governments continue to spend and banks, desperate to avoid a debt default, continue curmudgeonly to stump up the necessary funds.

No such moral hazard problem, though, exists for bond markets. The dispersion of ownership that is characteristic of bond markets means that individual creditors have no great stake in the borrower economy. So when a borrower ‘veers from economic discipline’, bondholders, given their size and heterogeneity, do not act collectively, but rather cut their ties with the debtor and sell their bonds in secondary markets without incurring a severe profit shock (Kaplan Reference Kaplan2013: 41). If this happens, uncooperative governments face ‘sudden-stops’. Fire sales of government debt in secondary markets create higher-risk premiums, drive up interest rates, depress government spending and the real economy and set in motion a vicious cycle of financial woe (Kaplan Reference Kaplan2013: 41). The run-up to the 1998 Venezuelan elections is a prototypical example of this dynamic. In early 1998, Rafael Caldera hoped to swell the economy to undermine the electoral threat posed by Hugo Chávez, but as oil prices fell, investors sold US$4 billion in Venezuelan bonds, leaving Caldera with little choice but austerity (Kaplan Reference Kaplan2013: 185–6).

Kaplan’s novel argument, rooted in psychology, really unravels the underlying causal mechanism between international lenders and their developing world debtors. In doing so, he cleverly demonstrates that international capital is also dependent on domestic political actors. Indeed, international banks can be forced into a Faustian pact with spendthrift politicians, which undermines their autonomy just as much as these banks are presumed to undermine the autonomy of developing world politicians.

In a similar fashion, Pinto’s central argument also emphasizes the mutual dependence of foreign investment and domestic political actors. Traditionally, it was assumed that capital was highly elastic to domestic tax regimes, thereby driving a ‘race-to-the-bottom’ as governments of all types compete for investment. As Pinto notes (Reference Pinto2013: 82), however, the relationship between foreign direct investment and national governments is far more symbiotic than this. Foreign direct investment usually becomes tax inelastic once costs have been sunk in physical assets. This, of course, leaves investors open to opportunistic behaviour from governments. The tax inelasticity of settled foreign direct investment provides host governments with an incentive to try and collect more taxes from them over time. For Pinto (Reference Pinto2013: 82), this ‘depends on the partisan orientation of the host government’. Specifically, pro-labour governments provide a guarantee of time consistency for investors, and foreign direct investment tailors their investment strategies to reflect the partisan orientation of the government. This creates a commitment mechanism between both actors, which is ‘supported by the potential to inflict harm on each other’ (Pinto Reference Pinto2013: 30).

The ability of foreign investment to influence the host government is dependent on the extent to which foreign direct investment complements labour in the production process. When this occurs, the interests of labour become congruent with the interests of foreign investment. In this scenario, pro-labour governments are ‘held hostage’ by foreign direct investment and will provide investors with preferential investment regimes and low levels of taxation (Pinto Reference Pinto2013: 84). In turn, investors will strategically select production technologies that promote the interests of labour. Left–labour coalitions will benefit from increased legitimacy and support from their core support as a consequence of the higher wages and greater employment opportunities for workers. Investors will remain confident that investment regimes will remain favourable under pro-labour governments, as now, any attempt by these governments to curb the interests of foreign capital will have damaging domestic political consequences (Pinto 213: 94). According to this logic, both labour-based governments and foreign investors become locked in an interdependent bargain.

In short, international economic actors do place pressure on policy in developing democracies, but the interests of international economic actors can also become subject to the vagaries of domestic politics. The reality of globalization is a complicated intertwining and interaction between the interests of domestic political actors and those of international capital.

DEMOCRACY STILL MATTERS

And so both books, in highlighting the divergent patterns of policy we observe in developing democracies in the contemporary era, place domestic political variables front and centre of their causal arguments. This is not necessarily new. For example, the literature on structural adjustment in emerging economies has highlighted the importance of powerful executives insulated from veto players (Haggard and Kaufman Reference Haggard and Kaufman1995), the necessity of building broad political coalitions (Frieden Reference Frieden1988), the role of political risk-perception in the wake of economic crises (Weyland Reference Weyland2002) and the relative power of labour (Rudra Reference Rudra2008), in driving reform processes.Footnote ⁴ The literature on the advanced industrial democracies has demonstrated the importance of labour movements, allied to political parties in producing policy divergence (Garrett Reference Garrett1998; also Jensen et al. Reference Jensen, Biglaiser, Li, Malesky, Pinto, Pinto and Staats2012); the path-dependent effects of previous policies and national institutional structures in channelling varied policy outcomes (Pierson Reference Pierson2004); and variation in the relational embeddedness of the firm in promoting distinct national varieties of capitalism (for example, Hall and Soskice Reference Hall and Soskice2001). Nonetheless, the causal mechanisms underpinning the relationship between domestic variables and the international economy in driving policy divergence in developing democracies remains somewhat opaque.

Both Kaplan and Pinto go some way towards filling in these blanks. The explanations of both books are largely based on the interests of competing domestic groups. The preferences of these groups respond dynamically to evolving economic realities and, dependent upon their influence and the nature of their interaction with the international economy, these interests are aggregated and channelled via political parties into varying policy outcomes. The end message is simple: democracy continues to be important in today’s world.

For Pinto, these competing groups take two forms: labour and indigenous capital, and their interests towards the national investment regime is a product of the distributional consequences of foreign investment. To the extent that foreign investment increases demand for labour in production, domestic labour groups stand to benefit from inward capital flows through higher wages and more employment opportunities. Domestic industry, particularly in developing markets, may have benefited from lucrative state contracts during the period of import substitution, and an influx of foreign investment can render indigenous capital uncompetitive in the domestic market. Pinto illustrates this dynamic with the case of Argentina. Foreign direct investment did not create backward linkages in the Argentine economy, but rather competed with domestic firms for local resources (Pinto Reference Pinto2013: 147–8). In contrast, the centrality of labour unions for the Peronist project ensured that ‘the sectoral pattern of protection and investment promotion observed in Argentina under Menem seemed to replicate the economy’s pattern of factor mobility’ and under Nestor Kirchner foreign direct investment was larger in sectors where investment had a strong effect on labour demand (Pinto Reference Pinto2013: 189–90). In fact, the intransigence of domestic Argentine capital towards privatization and foreign investment has been documented by others (for example, Corrales Reference Corrales1998). Some of the fiercest resistance to liberalizing reforms under Menem came from the patria contratistas, the domestic holding groups who made millions from state contracts. Supposedly, during the first months of the Menem administration, these domestic industrialists would barge into cabinet meetings and hysterically demand that Menem halt his reforms (see Corrales Reference Corrales1998: 29).

For Kaplan, the stake of domestic actors in budgetary discipline will be shaped by the distributional consequences of inflation. A number of Latin American countries suffered devastating bouts of hyperinflation in the 1980s and early 1990s, and where countries did suffer such economic crises in the past, we are most likely to find a heterogeneous alliance in favour of anti-inflationary policies. The poorest in society are those hit hardest by price instability, and middle-income voters in Latin America have repeatedly demonstrated a strong aversion to price instability (Kaplan Reference Kaplan2013: 61). In countries with a history of inflation, these groups, plus domestic business, will form a powerful low-inflation constituency. This means price instability will carry a heavy political cost, so politicians in inflation-scarred countries are more likely to appoint technocrats as finance ministers and to pursue austerity cycles. In this account, capital and labour are not competing with each other, but rather ally together as somewhat strange bedfellows in support of an anti-inflationary agenda.

Kaplan also draws on the example of Argentina to illustrate his argument. Before the hyperinflation crisis of the 1980s, economic stability was simply not part of the political discourse (Kaplan Reference Kaplan2013: 227). However, after the hyperinflation crisis, Argentine economic ministers suddenly became far more technocratic (Kaplan Reference Kaplan2013: 231), and under Menem, the Peronists ‘formalized their commitment to price stability through convertability in the 1990s’ (Kaplan Reference Kaplan2013: 232). Indeed, ‘by avoiding the trauma of past inflation, they could build support among a widespread domestic coalition favoring low inflation’ (Kaplan Reference Kaplan2013: 256). Before the 1995 elections, this aversion to inflation was heightened by the Tequila Shock of 1994, which sent ripples through Argentine bond markets, resulting in a perfect storm of austerity before the election. Despite this, Menem was still re-elected.

It is not just domestic political actors that matter in these explanations. Political institutions are also important, a point made most forcibly by Pinto. The results of Pinto’s cross-national regressions suggest that pro-labour governments wish to adopt investment regimes favoured by their labour constituencies. However, these governments are ‘institutionally and politically constrained’ (Pinto Reference Pinto2013: 113). As the constraints on left-leaning or pro-labour governments increase, their ability to pursue such policies is limited. In fact, Pinto (Reference Pinto2013: 113) even argues that constraints can lock in policies that are not favoured by the incumbent, and this can help explain why we often witness ‘pro-foreign investment policies when the incumbent party is of the right’. If I were to quibble, I would suggest that this argument is not traced in any great depth in the Argentine case study, a somewhat surprising omission, given the centrality of executive institutional prerogatives in explanations concerned with the pace and extent of economic reform under Menem (for example, Llanos Reference Llanos2001; Rubio and Goretti Reference Rubio and Goretti1996).Footnote ⁵

So, both these accounts clearly indicate that democracy remains a viable vehicle for channelling the interests of the electorate into policy. However, these interests are not homogeneous. Rather, they differ across policy areas. Let us consider the Argentine example again. In Pinto’s account, capital and labour directly compete over divergent preferences for investment. In Kaplan’s account, labour and domestic capital unite in support of economic austerity to prevent price instability. The ability of these groups to influence policy is conditional on the preferences and relative influence of international capital. In Kaplan’s story, the Tequila Crisis of 1994 drove heightened austerity in Argentina, even perhaps above and beyond the preferences of the electorate.

Domestic interests do matter, but why they matter and to what degree remains highly variable. It depends on the constellation of interests, and the interaction of these interests with the international economy. It suggests that we should not think of globalization in terms of a black or white, convergence or divergence debate, but rather should conceive of it as a complex, multidimensional process that varies across policy domains.

AND PARTISANSHIP MATTERS (BUT NOT AS WE MIGHT EXPECT)

One of the most striking aspects of the argument in both books is that partisanship, and specifically the left, remains relevant for policy outcomes in developing democracies. However, the left does not shape policy in the way we might theoretically expect. Based on our traditional interpretation of left and right (see Hibbs Reference Hibbs1977), we might expect left-leaning parties to favour labour over capital and to expand the size of the government in order to boost employment at the expense of inflation, and for right-leaning parties to favour capital over labour and to contract the national government to curb inflation at the expense of employment (Alesina and Roubini Reference Alesina and Roubini1992; Hibbs Reference Hibbs1977).

Although early proponents of the convergence thesis heralded a world where partisanship was no longer important for policy (for example, Przeworski and Wallerstein Reference Przeworski and Wallerstein1988), the literature on the advanced industrial democracies has provided a wealth of empirical evidence which suggests that left and right governments still shape policy according to their traditional partisan preferences in areas ranging from social spending (Boix Reference Boix1998; Garrett Reference Garrett1998) to macroeconomic policy (Oatley Reference Oatley1999) to privatization (Zohlnhöfer et al. Reference Zohlnhöfer, Obinger and Wolf2008).

For Pinto and Kaplan, partisanship remains important, but it does not produce the outcomes we expect, given this traditional interpretation of partisan politics (Hibbs Reference Hibbs1977). It is on the issue of partisanship that both Kaplan and Pinto depart from this status quo.

Kaplan argues that in Latin America left-leaning politicians will pursue traditional business cycles when not constrained by the global economy (or bond-holders, in this instance). This is what we expect. However, the history of inflation across the region has meant that left-leaning leaders, when it comes to macroeconomic policy, suffer from a greater credibility problem in comparison to their right-leaning counterparts. In countries with a history of inflation, therefore, left governments will be more orthodox and economically austere than other types of government. As Kaplan (Reference Kaplan2013: 60) argues, ‘if leftist politicians want to win elections, they believe they not only have to prove their governing credentials to a skeptical business community but also inflation-wary voters’. Consider Lula’s conciliatory ‘Letter to the People of Brazil’ in advance of the 2003 elections, which represented a notable dilution of the Workers’ Party (PT) policy (Kaplan Reference Kaplan2013: 275). Even though these left-leaning politicians may implement policies that contradict their traditional preferences, this does not necessarily sound the death knell for their electoral chances, for as long as rational voters can update their prior beliefs and recognize the benefits to be accrued from austerity policies – which stabilize the economy and prices – the left will be electorally rewarded for its orthodoxy.

Pinto’s argument similarly contradicts our traditional interpretation of partisanship. Given that the left will draw support from those who rely on government social transfers to sustain their standard of living, we might expect the left to increase taxation on foreign investment to fund redistribution and social spending. This is the macropolicy effect (Pinto Reference Pinto2013: 32; Quinn and Inclan Reference Quinn and Inclan1997). In turn, we might expect foreign investors to dislike the left, both because of redistributive taxation, and the left’s link to organized labour, which will result in greater labour regulation and higher costs for capital.

Pinto (Reference Pinto2013: 32–3) argues, however, that the relationship between foreign direct investment and the left is better understood within the context of a factor market effect, which will lead governments ‘to choose policy instruments that affect “relative prices,” which result in changes in the well-being of different economic actors in the marketplace’. For Pinto, as discussed earlier, foreign investment, particularly if it complements labour in the production process, will benefit labour by pushing up the demand for workers and consequently wages and employment opportunities. Of course, lower taxation on capital will directly affect the left’s ability to continue to channel social transfers to its supporters. Pinto (Reference Pinto2013: 33) models this trade-off in Chapter 2 and contends that ‘even when workers face this trade-off between market income and government transfers they would still offer better conditions to mobile capital’.

This dynamic creates the unusual commitment mechanism which arises between labour-based left parties and foreign investors. Foreign direct investment therefore, given a choice between parties who favour indigenous capital, hostile to foreign investment, and left parties who favour labour, supportive of foreign direct investment’s factor effect, will prefer the left–labour alliance. Counter-intuitively, the left will love foreign direct investment, and foreign direct investment will love the left.

Although a departure from the norm, neither Kaplan nor Pinto is alone in recognizing that left governments often behave unexpectedly in developing democracies, and that this behaviour may actually prove to be electorally beneficial. In fact, both these books contribute to a growing literature that is focused on the aberrant behaviour of left-leaning governments in emerging markets. Earlier explanations for the puzzling behaviour of the left have been rooted in economic crises and electoral concerns (Biglaiser and DeRouen Reference Biglaiser and DeRouen2004; Campello Reference Campello2014; Doyle Reference Doyle2012; Jensen and Lindstadt Reference Jensen and Lindstadt2012; Remmer Reference Remmer2002; Stokes Reference Stokes2001), thereby resulting in left governments embracing an over-zealous commitment to exchange rate targets, orthodox macroeconomic policies, privatization and low corporate tax rates. This, however, does not always carry an electoral cost. When uncertainty about the state of the economy is high, incumbents can improve their re-election prospects by advocating policies that stand in direct contrast to their traditional or expected position (see Cukierman and Tommasi Reference Cukierman and Tommasi1998). For example, both Karen Remmer (Reference Remmer2002) and Susan Stokes (Reference Stokes2001) have previously suggested that popular or left-leaning governments in Latin America, due to the legacy of inflation, will be more conservative in their economic policy choices than other governments. Stokes (Reference Stokes2001: 61) also argued that voters will update their beliefs about the utility of policy switches under left governments and, based on the personal utility they derived from such switches, will vote accordingly at the next election.

All of this suggests that we cannot understand partisanship in developing democracies through the traditional lenses as applied to the advanced industrial democracies. Across these countries, scholars have long argued that there is a lack of programmatic political parties (see Kitschelt Reference Kitschelt2000), but this is partly because parties are forced to react and learn in response to electoral pressures generated by variables, such as severe price instability or an abundance of low-skilled labour, which are no longer a feature of the political economies of the advanced industrial democracies. The opportunities for political parties in developing democracies to pursue programmatic and ideological policies are far more limited than those of their counterparts in other parts of the world.

RESOURCE RENTS AS FREEDOM?

If there is a scenario where left governments in developing democracies can implement policies that reflect their more traditional partisan preferences, it lies with resource rents. Where a government has access to large windfall revenue from the export of resources such as oil, copper or gas, this can undermine the pressures of international capital, and dampen the incentives for left governments to pursue unexpected policy paths.Footnote ⁶ For Kaplan (Reference Kaplan2013: 46), these non-market revenues ‘give politicians the fiscal space to spend more on their domestic agendas’, while for Pinto (Reference Pinto2013: 33), ‘the incentive to tax foreign investors more becomes stronger . . . particularly in extractive industries’.

In Kaplan’s account, resource rents enable stimulus-minded politicians to reduce their dependence on global bond markets, since they provide a separate source of revenue which allows politicians to channel public funds to public works and poverty programmes. In this scenario, stimulus-minded and notably left-leaning politicians are more likely to use fiscal and/or monetary policy to boost the economy, thereby replicating the traditional business cycle. Kaplan cites the examples of Eduardo Frei in Chile during the 1970 elections and Hugo Chávez in Venezuela in 2006. A surge in copper prices in the late 1960s (and a wave of nationalizations in the early 1960s in extractive industries) provided Frei with an abundance of windfall revenue in the run-up to the 1970 election. Frei used this revenue to engineer an electoral boom. He spent considerable resources on lower- and middle-income voters and encouraged heightened unionization, increasing the budget deficit in 1970 by 5 percentage points of GDP (Kaplan Reference Kaplan2013: 137–40). Similar incentives existed for Chávez in 2006. A sharp rise in the world’s oil prices provided him with ‘a golden key: an alternative financing source independent from global financial markets’ (Kaplan Reference Kaplan2013: 153). During the election year, Chávez spent US$7 billion in off-budget discretionary spending on his missiones programmes: wide-ranging redistributive projects that targeted adult literacy, education and medical care for the Venezuelan poor (Kaplan Reference Kaplan2013: 157).

According to Pinto, for some parties on the left of the political spectrum, particularly those whose core constituencies are unlikely to be affected by the presence of foreign direct investment and in countries with an abundance of natural resources, the temptation to tax foreign investment increases, especially when the price of these resources rise. Higher prices mean that foreign direct investment will be more willing to invest in those places where such resources are found, and the limited effect of multinational corporations on the well-being of labour, which does not directly gain from foreign direct investment when resource prices increase, means that the partisan relationship with investors is more likely to be driven by the macropolicy effect (Pinto Reference Pinto2013: 33–4). This means that left governments will oversee a harsher investment climate, with higher taxes and costs for investors. For Pinto (Reference Pinto2013: 34), this helps explain the inhospitable stance towards foreign direct investment taken by recent left leaders in Latin America, such as Hugo Chávez, Rafael Correa and Evo Morales.

The argument that resource rents (and their concomitant moral hazard problem) allow left governments greater policy autonomy in the face of global market pressures has previously been documented. Kurt Weyland (Reference Weyland2009) has argued that resource rents stimulate a propensity towards risk-taking and, during natural resource booms, provide an abundant source of capital which political leaders can exploit for their own political goals. For Robert Kaufman (Reference Kaufman2011), they ease the macroeconomic constraints imposed by dependence on international capital. This can help explain the divergent paths pursued by the ‘new left’ in Latin America. Those leftist leaders without the windfall revenue generated by resource rents were constrained by international capital (as per the arguments of Kaplan and Pinto) and so pursued orthodox economic policies. In contrast, those left leaders with access to resource rents were free to ignore the strictures of international capital and to pursue a more radical leftist policy path (Kaufman Reference Kaufman2011; Weyland Reference Weyland2009).Footnote ⁷

UNTANGLING THE MECHANISM FURTHER?

These two books provide a comprehensive account of globalization in developing democracies. Between them, they unpack the underlying causal mechanisms centred on the interaction between international capital – be it in bank, bond or investor form – and domestic politics in shaping policy outcomes in emerging markets. Until now, exactly how this interaction produced observable policy outcomes remained opaque. Kaplan and Pinto should be applauded for advancing our understanding of international political economy.

However, they do not answer all of our questions. Firstly, both these books are written from the perspective of international capital and political elites. Although both Kaplan and Pinto do consider the individual-level welfare effects of the unexpected policy trajectories pursued by the left, in general, the perspective of the electorate is largely missing. For example, in the Latin American case, we know that the electorate attaches similar and coherent understandings to the ideological content of the left–right distinction (see Wiesehomeier and Doyle Reference Wiesehomeier and Doyle2012), and we also know that the Latin American electorate turned to the left at the turn of the millennium because of its discontent with market reform (for example, Baker and Greene Reference Baker and Greene2011). But if, because of pressure from bond markets or the history of inflation, the left frequently pursues policies that contradict its policy platforms, what does this mean for democratic representation and political behaviour across the region? Although Kaplan (also Stokes Reference Stokes2001) argues that rational voters will recognize the benefits to be accrued from a change in policy, at the same time, such switches will surely undermine the faith of the electorate in the legitimacy of party brands (see Lupu Reference Lupu2013) and perhaps even democracy (although Kaplan (Reference Kaplan2013: 280–2) does consider the quality of democracy in Latin America). There must also be a notable time lag between a policy switch and the point at which a voter has updated their prior beliefs. How might this manifest itself in political behaviour? Might we see an increase in support for populism as the electorate becomes disillusioned with existing channels of representation? Or might there be increasing abstention? What does this mean for partisanship in Latin America? If the left adopts policies previously assumed to be the dominion of the right, what does this mean for political competition?

These are important questions, as they speak directly to the sustainability and continued applicability of these theories. In fact, it might even help explain why in Latin America we increasingly see the axis of political competition revolving around valance issues, such as crime and security, which are orthogonal to the traditional left–right divide (see Wiesehomeier and Doyle Reference Wiesehomeier and Doyle2014).

Even for Pinto’s analysis, the decision of the left to pursue accommodation over taxation with regard to foreign direct investment must affect its support base and the electorate more generally. Again, it reduces the policy space available for the right, and for those left supporters who are not part of organized labour this will surely inspire disillusionment and unhappiness. In the Latin American context, this is not an irrelevant point. One of the fastest-growing sectors of the labour market in recent years has been the informal sector, generally the poorest sector in society and the natural constituency of the left. This heterogeneous group remains unorganized and atomized, but it is difficult to imagine how this group might prefer accommodation over some type of targeted poverty relief, particularly in a world of increased automation, which renders low-skilled labour largely unnecessary. It is possible that the decision of left governments to pursue a policy of accommodation towards foreign investment in the future may be determined by the relative weight of the informal sector to the formal labour market.

Finally, Kaplan and Pinto’s conception of globalization as a complex, multidimensional process that varies across policy domains should not mean that these policy domains are separate from each other. Drawing Pinto and Kaplan’s analyses together, perhaps part of the reason the left may choose budgetary discipline is because it has reduced the amount of revenue available to it by lowering taxes on capital to benefit its labour constituencies. So in Argentina Menem was forced to follow a path of fiscal austerity, but at the same time he was crafting a more accommodating investment regime for foreign capital, in order to increase demand for labour in the Argentine economy. We need to consider the trade-offs between different policies, and how one partisan strategy might affect or shape another.

This is all for future research, however. For now, both of these excellent books should be read by any student or scholar interested in partisanship, globalization and capital in new democracies.