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Understanding Latin American political economy:

varieties of capitalism or fiscal sociology?

Andrew Schrank

To cite this article: Andrew Schrank (2009) Understanding Latin American political
economy: varieties of capitalism or fiscal sociology?, Economy and Society, 38:1, 53-61, DOI:
10.1080/03085140802560512

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 Economy and Society Volume 38 Number 1 February 2009: 53
61

Understanding Latin
American political economy:
varieties of capitalism or
fiscal sociology?
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Andrew Schrank

Abstract

Ben Schneider and David Soskice trace the origins and reproduction of Latin
Americas hierarchical market economies to the perverse synergy of: 1) free-market
economic reforms that systematically atomize (or demobilize) low-income consti-
tuencies; 2) majoritarian presidential elections that no less systematically ensure
middle-class support for an upper-class agenda marked by labour market dualism,
educational elitism, corporate conglomeration, and associational underdevelopment;
and 3) proportionally-elected legislatures that are particularly susceptible to
corporate influence. I worry that in their haste to incorporate Latin America into
the varieties of capitalism framework, however, Schneider and Soskice: 1) overlook
the Iberian roots of the regions principal economic institutions; 2) confuse
symptoms like ignorance, informality, and corporate conglomeration with causes
like inequality and fiscal underdevelopment; and 3) ignore not only the possibility
but the likelihood of left-wing mobilization in the wake of democratization and
international integration. And I therefore conclude with an alternative account that
addresses not only the historical roots but the contemporary contradictions of the
regions admittedly benighted political economies.

Keywords: Latin America; varieties of capitalism; fiscal sociology; taxation.

Ben Schneider and David Soskice raise the proverbial bar for students of Latin
American political economy. By offering a comprehensive interpretation of the

Andrew Schrank, Department of Sociology, University of New Mexico, Albuquerque, NM

87131-0001, USA. E-mail:schrank@unm.edu

Copyright # 2009 Taylor & Francis

ISSN 0308-5147 print/1469-5766 online
DOI: 10.1080/03085140802560512
 54 Economy and Society

regions woes, one that takes political institutions as well as economic interests
seriously, they bring unusual rigour and clarity to a discussion that has
altogether too often been opaque or incoherent
and thereby bring Latin
America back into the heart of contemporary political economy.
Schneider and Soskice depart from an ideal
typical model of a hierarchical
Latin American economy marked by labour market dualism, educational
elitism, corporate conglomeration and associational underdevelopment. While
the principal components of the model allegedly undermine skill formation,
social cohesion and collective bargaining, and thereby reproduce the regions
traditionally inequitable social orders, they are giving way to neither
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coordinated nor liberal alternatives, and Schneider and Soskice therefore go

on to ask why, however limited the model may be in its potential both for
economic development and for equality, it may be sustainable in the global
economy and arguably difficult to change (p. 33).
They trace the answer to the centre-right biases of the regions majoritarian
president/PR legislature electoral rules and their alleged magnification by the
collapse of prior patterns of corporatist incorporation (Schneider and
Soskice, p. 45) in the late twentieth century. First, Latin American parties
and presidential candidates are drawn to the electoral centre by the inexorable
logic of Duvergers law. They have little alternative but to cater to the interests
of the median programmatic voter. Second, the electoral centre is pulled to the
political right by the division and/or demobilization of the poor in the free-
market era. The median programmatic voter is likely to be a member of the
middle class who fears
rather than a member of the lower class who demands

redistribution. And, third, the private-sector beneficiaries of the Latin model
find it easy to take advantage of proportionally-elected legislatures. Doubtless
the large groups would still have influence in the absence of a PR legislature,
conclude Schneider and Soskice. But the basic point is that a PR legislature is
well designed to give individual politicians and parties power independent of
the presidency, and this is what conglomerate groups can exploit (p. 47).
In other words, Schneider and Soskice identify an endogenous feedback
loop between the hierarchical economy and the centre-right polity and in so
doing provide a plausible account of the regions current malaise.
The broad effect of hierarchical capitalism and flexible labour markets is to
fragment both the economic and social structures of the poor in countries where
low skill and educational levels are endemic [they write]. . . . Thus the political
system is unanchored from the poor and allowed to drift further to the centre
or centre-right: this applies both to the presidency and to legislators who are
elected by low-income votes. (p. 45)
I worry, however, that in their effort to bring Latin America back into the
core of political economy Schneider and Soskice are not only obscuring the
Iberian roots of the hierarchical market economy (HME) but are also
confusing symptoms like ignorance, informality and conglomeration with
causes like inequality and fiscal underdevelopment. After all, Latin American
 Andrew Schrank: Understanding Latin American political economy 55

policy-makers and public officials have traditionally found it all but impossible
to impose taxes on their powerful private sectors
let alone to ignore their
political demands. Figure 1 plots the average tax ratio for each variety of
capitalism (VoC) in 2005 and reveals persistent differences between
the revenue-poor hierarchical economies and their better-off northern
counterparts. In fact, Chile is the only HME to meet Arthur Lewiss (1966),
pp. 115
16) target developing country tax ratio of 20 per cent.
Latin America is not unique, however, for Spain and Portugal featured the
lowest tax ratios in Europe for the better part of the twentieth century
(Gunther, 1996, p. 160) and, like their New World offspring, compensated for
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their fiscal underdevelopment with two symbiotic strategies. On the one hand,
they deployed tariffs designed to raise revenue as well as to protect their infant
industries. Trade taxes are relatively easy to collect because imports and
exports are channeled through centralized port facilities, explains Stephen
Krasner. Even with smuggling and corruption (often very serious problems)
tariffs and export taxes are easier to obtain than direct taxes, which require
high levels of bureaucratic skill and voluntary compliance (1985, p. 46). On the
other hand, they developed low-cost alternatives to fiscally demanding income-

Figure 1 Tax ratio by VoC

Sources: Tax data for 2005 or closest available year from World Bank (2008).
Notes: LMEs include Australia, Canada, Ireland, New Zealand, the United Kingdom
and the United States; CMEs include Austria, Belgium, Denmark, Finland, Germany,
the Netherlands, Norway, Sweden, Switzerland and Japan (see Hall & Soskice 2001, pp.
19
20); HMEs include all eighteen non-communist Latin American countries. The
between-group differences are significant at pB.05 (F 4.11) with the HMEs
accounting for the bulk of the variation.
 56 Economy and Society

replacement programmes including comprehensive employment laws designed

to serve as their functional equivalent. Of course, the extent to which these
policies are truly functional equivalents depends on the target group under
consideration, writes Giuliano Bonoli (2003, p. 1008).
As far as core workers are concerned, labor market-based forms of social
protection can provide levels of economic security that are comparable (if not
superior) to those found in a full-fledged welfare state. For marginal workers
and for non-workers (female workers, young workers, or the long-term
unemployed people), labor market-based social protection is often of little use.
(Bonoli, 2003, p. 1008)
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The protection of capital and labour is not only less costly than their ex post
compensation but is simultaneously compatible with the mercantilist prefer-
ences of Latin elites who commonly commit themselves to an intermediate
statist model that is neither capitalist nor communist, in the words of Alfred
Stepan, by replacing private initiative with overall public regulation, at the
same time retaining the marketplace as the basic mechanism for the
distribution of goods and services (2001, p. 71). In fact, Figure 2 underscores
the coherence of the Latin model by plotting an index of employment
protection (e.g. the ease of hiring and firing) against an indicator of tariff
protection for representatives of the three varieties of capitalism at the dawn of
the free-market era.

Figure 2 The protection of capital and labour in Europe and the Americas
Sources: Employment protection index from Marquez and Pages (1998, Table 1);
mean tariff data from Sachs and Warner (1995, Table 6).
Note: I include all countries for which data are available on both variables.
 Andrew Schrank: Understanding Latin American political economy 57

The Latin American HMEs cluster in the top-right corner of the graph.
The most developed welfare states within Latin America
i.e. Argentina,
Brazil, Chile, Costa Rica and Uruguay (Mesa-Lago, 2008, p. 4)
are generally
less protective than their benighted Andean and Mesoamerican neighbours.
And Spain and Portugal occupy a buffer zone between the HMEs and the
CMEs
with the LMEs clustering towards the origin.1
The point is not so much to deny the features of the HME described by
Schneider and Soskice but to trace their origins to the fiscal underdevelopment
of the Latin state and not
as they would imply (p. 46)
vice versa.
Informality is the inefficient firms response to the imposition of burdensome
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labour laws that are themselves functional alternatives to costly welfare efforts
(Tybout, 2000, p. 16). Conglomerates are designed to take advantage of
protectionist measures that serve double duty as revenue-generating devices
(Garrido & Peres, 1998, p. 131). And elitist educational systems are
simultaneously symptoms and by-products of fiscal underdevelopment, for
states that are unable to extract resources from their citizens (and guests) are
unlikely to develop the social and political bases of widespread skill formation
(Estevez-Abe et al., 2001).2
Is an escape route available? Spain and Portugal began to abandon
mercantilism for a neo-corporatist alternative in the 1970s and 1980s
(Royo, 2002), when they at long last put paid to dictatorship and joined the
European Community, and Alvaro Espina therefore concludes his recent effort
to draw lessons from the Spanish experience by equating commercial isolation
with inequality and underdevelopment. The autarchic period
with its
correlates of dirigisme, aversion to the market, monetary activism, and
exchange rate manipulation
gave rise to the worst results in the economic
history of contemporary Spain, he writes, because it inhibited the exploitation
of comparative advantages like low cost, unemployed labour and gave the
private sector an incentive to pursue concessions and monopoly rents rather
than to concentrate on economic efficiency and organizational and technolo-
gical innovation (2007, p. 39, my translation).
Espina goes on to discuss Latin Americas more recent pursuit of a
commercial opening that seems irreversible (2007, p. 40, my translation)
against the backdrop of Spains earlier success and offers a guardedly
optimistic prognosis for the growth of a neo-corporatist model designed to
reconcile social protection with economic efficiency (2007, p. 54). Nor is he
alone. Others have identified nascent neo-corporatist projects (Korzeniewicz &
Smith, 2000, pp. 40
1; Etchemendy & Collier, 2007, p. 363) or their potential
building-blocks (Snyder, 2001) in Latin America itself. For example, the
International Labour Office (2008, pp. 31
2) holds that minimum wages are
established by tripartite bodies in most Latin American polities. Mara
Angelica Ducci (1997, p. 160) finds that tripartite training authorities are
growing more innovative as well as more influential throughout the region (see
also Gallart, 2008). And Michael Piore and I have documented the
resuscitation of a distinctively Latin approach to labour market regulation
 58 Economy and Society

that is designed to reconcile the allegedly incompatible goals of productive

efficiency and worker protection (Piore & Schrank, 2008, p. 1).
The point is most certainly neither to paint a sanguine portrait of Latin
Americas future nor to ignore the potential pitfalls of neo-corporatism (Kay,
2003) but instead to underscore the fact that seemingly isolated fragments of
alternative economic models constitute resources for institutional assembly,
revival, recombination, and redeployment, in the evocative words of March
Schneiberg, and can be used to support further experiments, political
mobilization for alternatives, and even the creation over time of wholly new
pathways within the womb of the older order (2007, p. 70). Are new pathways
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likely to emerge in twenty-first-century Latin America? While Schneider and

Soskice believe that the regions electoral model
which admittedly differs
from Spanish PR
is simultaneously reinforced by and reinforces the HME
(p. 44), and therefore anticipate the reproduction of hierarchy, their account
has arguably been overtaken by events. After all, Latin American polities are
ultimately pulled to the right neither by majoritarian presidents nor by
proportional legislatures per se but by the alleged atomization of the popular
classes
and the corresponding disjuncture between the interests of the
median eligible voter, who is in all likelihood poor, and the interests of the
median programmatic voter, who is in all likelihood a member of the middle
class. While Schneider and Soskice assume that the neo-liberal underpinnings
of the HME (e.g. privatization, deregulation and liberalization, etc.) have
demobilized and/or divided the working class, and have thereby undercut the
social basis of populist or left politics, their assumption is at odds with the
weight of the empirical record. For instance, Moises Arce and Paul Bellinger
recently found that economic liberalization has led to a significant increase in
the level of political protest in Latin America (2007, p. 100, emphasis added).
Kathy Hochstetler (2006) warns that free-market reforms are associated with
challenges to presidential authority in particular. And Ken Roberts concludes
that protest and resistance have restored a measure of political choice to the
policy-making process, where states had reflexively deferred to the structural
imperatives of global markets in recent decades (2008, p. 328).3
Left-leaning parties hold power in more than half of the regions democratic
polities (Walker, 2008). They dominate key provinces and municipalities as
well (Chavez & Goldfrank, 2004). And the defining feature of Latin American
politics today is therefore not stasis
the endogenous feedback loop between
hierarchical production regimes and hierarchical politics posited by Schneider
and Soskice
but change.4 The relevant question is therefore not why but
whether the HME will survive and what might take its place. Neo-corporatism?
Paleo-populism? Or something else entirely? The answers are likely to depend
not only upon the resolution of coordination problems in the realms of
training, industrial relations and corporate governance but upon efforts to
address deeper
but by no means intractable
problems of fiscal capacity
(Moore 2004).
 Andrew Schrank: Understanding Latin American political economy 59

By way of conclusion, therefore, I would like to emphasize three points.

First, efforts to trace the persistence of inequality to the character of the HME
tend to confuse symptoms with causes. Latin American policy-makers do not
have trouble taxing and redistributing income and wealth because their
markets are hierarchical; their markets are hierarchical because they have
trouble taxing and redistributing income and wealth. Second, the architects of
the varieties of capitalism approach would do well to add fiscal sociology
(Campbell, 1993; Moore, 2004) to their conceptual and methodological
toolkits. Industrial relations, skill formation and corporate governance are
undoubtedly central to the operations of modern political economies but their
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origins and evolution all but necessarily depend upon the state and nature of
public financial arrangements that have until now been all but external to the
VoC model. And, finally, Latin Americas future is decidedly less certain than
Schneider and Soskice would have us believe. After all, the principal
components of the HME are legacies of a mercantilist model that is by now
anachronistic rather than features of an equilibrium that is firmly entrenched

and the door is therefore open to new ideas, new models and new coalitions.
While majoritarian electoral rules have a tendency to inhibit the growth and
diffusion of radical alternatives, as Schneider and Soskice persuasively argue, a
majority of the regions citizens have an incentive to demand serious reform

and out of this volatile mix, anything is possible.

Acknowledgement

I would like to thank Ben Schneider and David Soskice for a stimulating
debate, and Diego Sanchez and the editors of Economy and Society for their
support.

Notes

1 See the notes to Figure 1 for country classifications. While Hall and Soskice assign
France, Greece, Italy, Portugal, and Spain to an ambiguous Mediterranean position
marked by a large agrarian sector and recent histories of extensive state intervention
(2001, p. 21), they simultaneously portray their labour relations as liberal, and thereby
ignore the historical basis and impact of employment protection legislation. Neither
Hall and Soskice nor Schneider and Soskice classify the non-Hispanic Caribbean
countries; they are included for the sake of completeness and appear to constitute a
high tariff/low EPI group of their own.
2 Ex post (or compensatory) safeguards would appear to trade off with ex ante (or
protective) safeguards on a systematic basis and to have elective affinities with high-tax
(i.e. CME and LME) and low-tax (HME) polities respectively. In fact, the bivariate
correlation between the percentage of social expenditures in GDP (Pierson, 2003) and
the trade and employment variables displayed in Figure 2 are -.7 (pB.001) and -.5
(p B.005) respectively. Complete analysis available from author on request.
 60 Economy and Society

3 Furthermore, Latin American employers may be more open to neo-corporatist

overtures or class compromises than we know. After all, Barbara Stallings and Jurgen
Weller (2001) conclude their recent study of Latin American labour markets by noting
that South Americas comparative advantage is not in low-cost labour and that skill
upgrading is therefore a necessity in much of the region, and Celso Garrido and Wilson
Peres (1998) maintain that Latin American business groups are responding to market
opening by modernizing their plant and equipment, professionalizing their personnel
and exporting their products more generally.
4 While Schneider and Soskice portray recent left victories as products of commodity
export booms that leave median voters with less to fear from leftist candidates (p. 46),
their argument is difficult to credit. After all, Hugo Chavez won his first presidential
election in 1998, when world oil prices were at historic lows, and left parties have gone
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on to win the presidencies of countries like Nicaragua, Paraguay and Uruguay that are
difficult to classify as beneficiaries of commodity export booms.

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