The Case of Argentina
Chapter 4 provided evidence of a complex relationship among fis- cal decentralization, the revenue raising capacity of subnational gov- ernments, intergovernmental party system structure, the size of the coalition of antireform provinces and the distinctly federal politics of macroeconomic policy making. Consistent with the model of inter- governmental bargaining presented in the theoretical chapter, the find- ings suggest that intergovernmental fiscal systems that are decentralized and promote subnational taxation, partisan harmony whereby the na- tional government can rely on copartisans at the regional level, and large coalitions of pro-reform regions in the national policy-making process help solve the intergovernmental coordination problems that can plague macroeconomic policy in federations. Perhaps most impor- tant, these findings call into question the long-held assumption that policies aimed at decentralizing economic decision making to lower- level governments will generate widespread efficiency gains. Clearly, policy analysts and the traditional fiscal federalism literature have un- derappreciated the narrow conditions under which decentralization may provide virtuous outcomes and failed to appreciate the consid- erable margin for intergovernmental coordination problems vis- `a-vis economic policy. Given data constraints, however, the broad cross- national statistical analyses that have characterized previous chapters provide a limited basis for comprehensively testing my model of inter- governmental bargaining and further exploring the conditions under which national and regional officials are able to coordinate policies.
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In carefully distinguishing between the ways in which intergovern- mental partisan harmony can influence the incentives of decentralized politicians, this chapter focuses specifically on the ways in which party systems shape the likelihood of policy coordination across levels of government.
To get more substantively at the important distinction in my model between party systems that promote intergovernmental coordination by virtue of central compulsion versus those that do so via coattails, I conduct an in-depth analysis of intergovernmental politics and eco- nomic policy making in Argentina – a case in which the party sys- tem lacks coattails but has experienced periods in which a national governing party had significant resources to discipline subnational copartisans. Distinguishing between these two types of intergovern- mental partisan harmony is important, for although researchers com- monly suggest that party systems are an important means to vertically integrate policies, they have not identified the multiple mechanisms by which party systems might do so. In short, they have not distinguished between partisan harmony via central carrots and sticks and coattails.
Implicitly, most analysts emphasize the importance of strong central parties capable of enforcing contracts, imposing reforms, and disciplin- ing subnational governments. This version of partisan harmony relies on the capacity of national parties to impose policy coordination on regional copartisans. My argument, on the other hand, is that shared interests via coattails is a more promising avenue for coordinating mar- ket reforms across levels of government. Argentina in the1980s and late1990s had profoundly weak intergovernmental partisan harmony, which contributed in no small part to that nation’s current and past economic meltdowns. In contrast, the Argentina of the1990s was a case of strong partisan harmony, with a relatively powerful President Menem heading a national Peronist party that held a solid majority of provincial governments. This was clearly a period when national in- fluence with subnational politicians was a result of vertical carrots and sticks rather than coattails. Menem used partisan and fiscal resources at his disposal to coerce and cajole provincial politicians into reforms that contributed in the short term to a broad and radical market reform package. As such, the Argentina of the1990s represents a most likely case for federal reform according to the popular sentiment in favor of strong, centralized parties.
Nevertheless and consistent with the expectations laid out in the the- oretical chapter, this type of partisan harmony proved unsustainable, and permanently correcting the structural problems of Argentina’s in- tergovernmental fiscal system did not happendespitethe strength of the national governing party. Quite the contrary; in response to Menem’s attempts to centralize control over provincial fiscal policy, subnational actors sought to protect their interests by inserting ever greater rigidi- ties into the intergovernmental fiscal system. These rigidities became unsustainable when the central government’s partisan control over the provinces declined in the latter1990s and contributed to Argentina’s ongoing economic collapse. Indeed, as will become clear later, the brief period of reform success underscores how fragile the conditions are for the successful intergovernmental coordination of economic policies via central party compulsion.
The following analysis lays out the theoretical underpinnings for the expectation that strong national parties are an important corrective to common intergovernmental conflicts over economic policy, explores the recent experience of Argentina as a crucial case that attempted to overcome this conflict with the vertical concentration of authority, and underscores the limits of such an approach for the long term sustain- ability of market reforms. In moving beyond the blunt measure of par- tisan harmony used in Chapter4, I place significant emphasis on party system factors in mediating the central dilemma of decentralization in federations – that democratically elected subnational and national politicians often have incentives to pursue contradictory economic poli- cies. In Argentina, subnational politics were crucial to former President Menem’s market reform initiatives in the early1990s. It was through intergovernmental partisan relations, however, that the reform process was filtered, ultimately shaping the intergovernmental system evident today in Argentina. In emphasizing partisan factors, the research makes three contributions to our understanding of the relationship between federal politics and market reforms. First, the oft-cited importance of a strong central government to enforce economic rationality on the regions (Blanchard and Shleifer2000; Stepan2000; Goohra2001) is likely to contribute to market reforms only in the short term. Second, the capacity of national governments to promote subnational market reforms in such contexts is contingent on a number of factors, particu- larly the strength of the national party in the provinces, the popularity
of the chief executive, and strong economic growth to finance federal largesse. Third, coattails whereby the electoral fate of subnational of- ficials depend in large part on the performance of their copartisans at the national level represent a more reliable intergovernmental political foundation for market reforms than central government inducements.
Partisan Harmony, Centralization, and Market Reforms
Increasingly, researchers find a political solution to intergovernmen- tal economic conflicts in augmenting the authority of the central gov- ernment. The logic behind strengthening the center is clear. Intense collective action problems preclude either provincial governments or national legislatures from mounting a unified attack on bailout mecha- nisms. National constituencies, however, elect national executives and judge on the basis of national economic performance rather than more parochial, regional concerns. As such, the sole actor with the incentives to implement rational economic policy and enforce it on subnational governments is the chief executive.1The obvious means to achieving market-preserving federalism, it would seem, would be to strengthen the most market-friendly actor in the federation.2
It is analyses such as these that contribute to the widespread percep- tion that many developing federations suffer from an overly weak cen- ter subject to regional predatory behavior. In a broad survey of decen- tralization and soft budget constraints, Rodden, Eskeland, and Litvack suggest that “. . .the national government and its institutions might be weak – lacking instruments, guts, or both – in its ability to enforce loan contracts.”3 Stepan (2000) bemoans how Brazil’s constitution gives the central government so little macroeconomic authority vis- `a-vis state governors. Likewise, Goorha (2001), Solnick (2000), and others lament the weakness of the central government vis- `a-vis regional bosses. In a comparison of China and Russia, Blanchard and Shleifer (2000)
1Arguments in favor of centralization are made in both the public finance literature, which emphasizes the importance of centralizing budgetary processes, and the market reform literature, which suggests that policy makers can only bear the short-term costs of the transition to markets when they are insulated from social actors.
2See Inman and Rubinfeld (1997:47–8) on a similar tendency to defer to a strong central government in the traditional fiscal federalism literature.
3Rodden, Eskeland, and Litvack (2003:12).
go so far as to argue that China’s political centralization has been the defining feature of its robust growth. This contrasts with Russia, where
“the central government has been neither strong enough to impose its views, nor strong enough to set clear rules about the sharing of the pro- ceeds of growth. As a result, local governments have had few incentives either to resist capture or to rein in competition for rents” (Blanchard and Shleifer2000:2). Even in Mexico, historically one of the most cen- tralized federations in the world, Amieva-Huerta (1997:591) argues that “. . .the federal government has had difficulty imposing financial discipline on the states.”
Many researchers emphasize the importance of increasing the na- tional orientation and discipline of party systems as a means to em- power central governments. This emphasis is not new – the study of federalism has long focused on the role of parties in mediating rela- tionships across levels of government (Grodzins1960; Riker 1964).
More recently, research on Russia (Ordeshook1996; Ordeshook and Shvetsova1997), India (Chhibber and Kollman1998; Chhibber1999), various Latin American federations (Mainwaring1999; Stepan2000;
Garman, Haggard, and Willis 2001), and a handful of OECD fed- erations (Rodden2003) has refocused attention on the importance of party systems in shaping the relative balance of power between national and subnational decision makers. The conventional wisdom holds that where national party leaders can discipline party members at various levels of government, it becomes easier to implement coherent, uni- fied policies that transcend jurisdictional divisions. By extension, the reform of soft budget constraints and imposition of economic disci- pline becomes easier the greater the leverage of national partisans over their subnational counterparts. These observations are often accom- panied by recommendations for centralizing party influence, includ- ing concurrent elections to foster coattail effects (Shugart and Carey 1992), national control over party nominations (Samuels2000), and high barriers to representation to limit party system fragmentation (Mainwaring1999).
Yet, as discussed in Chapter 2, partisan harmony can result from central imposition (as traditionally envisioned from Riker onward) or coattails. Central imposition implies that regional politicians comply with market reforms because of the leverage national party officials have over their careers. Such leverage and the success of the market
reform project will depend in part on the popularity and commitment of the national leadership, the carrots and sticks available to national leaders, and the partisan strength of the nationally governing party in the regions. Many current comparative federalism scholars implicitly favor this type of partisan harmony. Partisan harmony by coattails, on the other hand, means that regional politicians comply out of the shared political interests with their national copartisans. Rather than relying on the capacity of national officials to discipline their subnational coun- terparts, coattails generate subnational concern for public goods as a result of the close ties between the electoral fate of national and sub- national officials. This can occur in two ways. First, in the language of Rodden (2003), copartisanship can encourage “electoral externalities,”
whereby subnational politicians aligned with the central government forego particularistic benefits (fiscal profligacy, for instance) in favor of reforms that benefit their party as a whole (e.g., stable macroeconomic performance). If subnational officials fail to contribute to fiscal con- straint, for instance, the resulting economic difficulties will weaken the national party, thus reducing their own reelection chances. In this case, regional politicians will coordinate policy out of prospective concerns for what might happen in future elections if they do not. Second, the results of a presidential election in a governor’s or state representative’s region provides information as to voters’ opinions and policy prefer- ences (Buck 1972; Martin 1976). When voters show strong support for a national executive’s economic strategy, subnational copartisans are likely to see it in their interest to coordinate policy and contribute to its success. As Buck notes of the U.S. case, “Perceptions of a link between evaluations of presidential and congressional candidates may affect the propensity of House members to support a president’s pol- icy initiatives.”4 In this case, coattails are influential because regional politicians will use retrospective analyses of the presidential vote to de- termine their own level of commitment to national economic policies.
Although widely concerned with the role of parties in shaping inter- governmental politics, most research on federalism fails to distinguish between these two types of partisan harmony.
Nevertheless, there are good reasons to believe that shared inter- ests (via coattail effects) are a more reliable form of intergovernmental
4Buck (1972:471).
partisan harmony than the use of vertical carrots and sticks, despite the mounting popularity of centralized parties among many researchers.
Indeed, for all of its flaws, the market-preserving federalism literature warns quite clearly that centrally imposed formal fiscal constraints are problematic. Weingast (1995), for instance, warns that excessive cen- tralization results in an all but uncheckable national government. In the hay days of their party-dominant regimes, neither Venezuela nor Mexico, for instance, proved particularly adept at fostering market re- forms. Likewise, neither in India (during the1980s) nor Nigeria were formally powerful central governments noteworthy for their capac- ity to foster economic policy change. In all of these cases, the surplus of party discipline, hyperpresidentialism, and overcommitment to na- tional as opposed to regional concerns fostered an approach to reforms that ignored the importance of regional political contexts. Instead of fostering regional economic rationality, such centralization can pro- vide a highly attractive target for regional rent-seeking and bailout claims.
Relatedly, the capacity of a strong central party to foster subnational and intergovernmental market reforms is contingent on a number of transient factors. Success in such an endeavor is likely to depend most significantly on the strength and commitment of the chief executive, growth in the economy to finance the carrots needed to generate sub- national compliance, and a dominant position of the national party in the regions. Of course, in the absence of a chief executive committed to politically challenging market reforms, the strong center approach is a nonstarter. As Shleifer and Treisman (2000) explain, reformers need to arrive at the right place and the right time for policy change to become a tactical option. Such is not the case when chief executives are unpopular and lack political capital. Even the most committed and popular president, however, needs resources to finance the intergovern- mental bargaining needed to foster regional reforms. In the Russian (Ordeshook 1996; Treisman 1999c), Brazilian (Samuels 2002), and Argentine (Tommassi2002) contexts, scholars have pointed to the im- portance of selective central spending to grease the wheels of peace and reform in federations. Ordeshook explains, “If federalism is an N +1 person bargaining game that is somehow directed and mod- erated by constitutional barriers, then it seems reasonable to suppose that political stability can arise only if that game is positive sum for
all participants. That is to say, stability requires that dissident federal subjects can be bought off by the rest or that public benefits provided by the center are such that no subject or coalition of subjects can hope to secure more by seceding from the rest.”5Of course, many reforms can be made positive-sum for all regions only if there are consider- able side payments from the center to defray political and economic costs. Absent strong growth, it is unlikely that the center will have the resources needed for such payments. That Ordeshook goes on to emphasize the fragility of federal stability built solely on growth under- scores the limitations of economic reform projects constructed on the back of central government largesse. In the absence of fiscal bounty, the carrots and sticks available to the center are correspondingly dimin- ished. Finally, even a popular president with abundant fiscal resources and considerable formal powers over regional copartisans is likely to be sharply constrained if his or her party holds a weak position in the regions. Theprevious chapteras well as recent cross-national (Rodden and Wibbels2002) and case study evidence (Jones, Sanguinetti, and Tommasi 2000) suggests that where copartisanship across levels of government is weak, central governments are less able to foster cooperative subnational policy. However, the factors discussed earlier – presidential popularity, fiscal resources, and partisan strength in the regions – suggest just how vulnerable the centralizing approach to mar- ket reforms is to changing political and economic circumstances. As the case study here demonstrates, these conditions can change rapidly with profound and negative implications for economic management, regardless of how formally powerful the center is.
Third, and finally, the centralizing approach inherent in the car- rots and sticks approach can encourage regional leaders to engage in protective behavior that reduces the likelihood of future policy coordi- nation and threatens the long-term viability of market reforms. Spiller and Tommasi (2003) explain that when subnational leaders are under political pressure and their time horizons are commensurately short- ened, they are likely to respond to central pressure with initiatives that tighten constraints on the national government’s capacity to apply that pressure in the future. Being self-interested politicians concerned with
5Ordeshook (1996:2000).
opportunism on the part of the federal government, they will react with political and institutional initiatives intended to maximize their future latitude at the expense of the center. Once again, the key problem is that the political incentives of national and regional leaders often di- verge with respect to market reforms. If regional leaders are forced to reform in ways that are inconsistent with their regional constituent’s interests, they are likely to challenge the center’s long-term capacity to act vis- `a-vis the regions. As opposed to regionally designed reforms that respond to regional political realities, national ones are unlikely to fully consider the full range of political costs and benefits for sub- national elites. Armijo and Jha emphasize this point in a study of the intergovernmental politics associated with privatization in Brazil and India: “Often a greater willingness by the centre to respect the percep- tions and distributions of costs and benefitsas experienced by the state government. . .can help to resolve these conflicts.”6As regional leaders attempt to check the center’s capacity to meddle, the result may be inter- governmental institutional innovations that make central-regional pol- icy coordination even more difficult. In the Argentine case, the provin- cial reaction to centrally inspired market reforms was a series of new constitutional provisions that further institutionalized key features of the distortionary fiscal system and exacerbated political difficulties as- sociated with coordinating policy responses to that country’s mounting economic problems. Those rigidities became even more problematic as partisan harmony declined in the1990s – indeed, they contributed to the nation’s ongoing economic collapse. Ironically, therefore, the cen- tralizing approach is likely to lead to reforms that fail to reflect local political calculations while contributing to increased economic rigidi- ties in the long term.
In contrast, regional reforms that emerge from coattails do not depend on a hegemonic center, are less dependent on contingent cir- cumstances and unlikely to contribute to long-term inflexibility in intergovernmental relations. When the electoral success of national copartisans has serious implications for the reelection chances of re- gional politicians, coattails exist. Given coattails, regional officials may face incentives to forego particularistic benefits in favor of contributing
6Armijo and Jha (2000:128).