Plus ça Change: Explaining Neoliberal Continuity in Chile and Estonia

How do neoliberal political economies threatened with loss of competitiveness and social cohesion manage to remain neoliberal over time? This paper answers this question by studying mechanisms of institutional continuity in Chile and Estonia from a political perspective. Chile and Estonia have been portrayed as poster children of market reform thanks to radical liberalization processes under strong neoliberal ideologies. After three decades of neoliberal development, structural transformation and external shocks have undermined these “success stories” competitive edge and domestic social cohesion. However, Chile and Estonia show a surprising continuity of their economic policy regimes and institutions over the years. If one understands institutions in their distributional consequences, this continuity reflects the ability of dominant economic and political groups to retain their preferred institutional framework at the expense of the worsening fates of other groups.

There is a significant gap in the literature when trying to understand these trajectories of neoliberal continuity. The literature on the political economy of policy reforms in developing countries concentrated too much on how market reforms where initiated, but little on how they were reinforced afterwards (Haggard and Kaufman 1992; Etchemendy 2012). Conversely, while there is a vast literature on institutional continuity and change in advanced political economies, a fixation on institutional mechanisms alone has obscured the often more important political dynamics behind them. In fact, several authors have recently moved to demand a stronger incorporation of power and politics into theories of institutional development (Amable and Palombarini 2009; Streeck 2010). Finally, there is a dearth of literature addressing the specific patterns of institutional development in neoliberal political economies. Following the 2007-8 crisis several volumes have tried to reconcile these claims (Crouch 2011; Streeck 2014; cf. Schmidt and Thatcher 2013). With few exceptions, however, these contributions address the continuity of neoliberalism as an international regime and its impact on more or less coordinated market economies, rather than on neoliberal political economies per se.

This article fills these gaps by 1) offering a political theory of institutional continuity that 2) explains continuity in neoliberal political economies. In concrete, I extend Mahoney and Thelen’s (2010) framework of gradual institutional change by incorporating institutional hierarchy (Amable 2003; Amable and Palombarini 2009) as a third factor to their two-factor explanatory approach. The idea behind is that continuity and change are two faces of the same coin. Institutional continuity, I argue, depends not only on the characteristics of the political context and the rigidity of institutions, but also on the relation between different policy fields/institutions and the importance dominant groups assign to them. This addition produces four new mechanisms of change responsible for political continuity. Dominant groups try to retain their preferred institutions by altering their parameters (marginal adjustment), narrowing their interpretation (solidification), or negotiating minor/larger concessions in other policy fields (accommodation/compromise).

In the paper I analyze two policy fields in parallel: exchange rate regimes and industrial policy. These policy fields are critical to understand the patterns of international economic integration of non-advanced political economies, and are often thought in conjunction when adopting a development strategy; moreover, a focus on policy allows understanding institutionalization as a process that is endogenous to the political struggles over the continuity of a particular development strategy.

The empirical part applies the proposed framework to analyze the trajectories of institutional and political change produced by struggles over exchange rate and industrial policies, focusing on the politico-institutional dynamics at specific economic and political turning points. In Chile, neoliberalism has been kept alive by a combination of compromise and solidification. A narrow neoliberal bloc composed of right-wing military and business groups in the financial sector was forced to widen its business support base in order to defend neoliberalism amidst an acute financial crisis in 1982-3. It incorporated export business sectors into the dominat bloc through compromise, introducing more pragmatism both in exchange rates an industrial policy; After democratization in 1990, the neoliberal bloc defended exchange rates by solidifying their surrounding institutions (e.g. central bank independence, fiscal policy rules), and conceded to a more embedded industrial policy so as to ease pressures from center-left parties in government. In Estonia, neoliberalism has been kept alive through marginal adjustment. Right-wing parties with the help of a rising financial sector (domestic first, foreign controlled later) have managed to insulate exchange rates leaving them with only minor adjustments in two crisis episodes: the Russian crisis in 1997-8 and the global financial crisis in 2008-9. They, however, accepted a slight increase in industrial policy as part of their quest for an external anchor to domestic neoliberalism -i.e. EU accession. Chilean neoliberalism shows a more nuanced trajectory given the need to incorporate wider business sectors into the dominant bloc; Estonian neoliberalism, by contrast, shows a tighter path and the consolidation of neoliberalism after adopting the euro in 2011.

Literature

Amable, Bruno. 2003. The Diversity of Modern Capitalism. New York: Oxford University Press.

Amable, Bruno, and Stefano Palombarini. 2009. “A Neorealist Approach to Institutional Change and the Diversity of Capitalism.” Socio-Economic Review7 (1): 123–43. .

Crouch, Colin. 2011. The Strange Non-Death of Neo-Liberalism. Cambridge: Polity Press.

Etchemendy, Sebastián. 2012. Models of Economic Liberalization. Business, Workers, and Compensation in Latin America, Spain, and Portugal. New York: Cambridge University Press.

Haggard, Stephan, and Robert R. Kaufman. 1992. The Politics of Economic Adjustment. Princeton, NJ: Princeton University Press.

Mahoney, James, and Kathleen Thelen. 2010. “A Theory of Gradual Institutional Change.” In Explaining Institutional Change: Ambiguity, Agency, and Power, edited by James Mahoney and Kathleen Thelen, 1–36. New York: Cambridge University Press.

Peck, Jamie, and Nik Theodore. 2007. “Variegated Capitalism.” Progress in Human Geography31 (6): 731–72.

Schmidt, Vivien A., and Mark Thatcher. 2013. Resilient Liberalism in Europe’s Political Economy. New York: Cambridge University Press.

Streeck, Wolfgang. 2010. “E Pluribus Unum? Varieties and Commonalities of Capitalism.” MPIfG Discussion Paper 10/12. Cologne.

———. 2014. Buying Time: The Delayed Crisis of Democratic Capitalism. New York: Verso.