424 Inflation and Stabilization
claim that deficit financing is inflationary, arguing that the mobilization of unused
spare capacity, declining costs, and, if necessary, controls, will moderate inflation.
Populist experiments go through a typical cycle, usually triggered by orthodox
stabilization efforts:
Phase 1. Policy makers enjoy a honeymoon as their prescriptions appear to
be vindicated. Output grows and real wages and employment improve.
Direct controls are used to manage inflation. The easing of the balance
of payments constraint and the buildup of reserves under the previous
orthodox program provide the populists a crucial cushion for meeting
import demand.
Phase 2. Strong domestic demand starts to generate a foreign exchange
constraint, but devaluation is rejected as inflationary and detrimental
to maintaining real wage growth. External controls are instituted.
The budget deficit widens because of the growth of subsidies on
wage goods and on foreign exchange.
Phase 3. Growing disparity between official and black market exchange rates
and general lack of confidence lead to capital flight. The budget deficit
deteriorates because of continuing high levels of expenditure and
lagging tax collections. Inflation soars.
Phase 4. Stabilization becomes a political priority, and the principal political
debate concerns whether to pursue a more “orthodox” or “heterodox”
policy mix.Why do such cycles appear in one political setting and not in another? Stop-and-
go macroeconomic policies themselves are partly to blame, since they carry
particular costs for urban workers. One determinant of such populist cycles is the
way urban political forces are initially organized—in other words whether historical
partisan alignments mute or reinforce sectoral and class cleavages.
In Argentina, Peru, Chile, and Brazil, antioligarchical parties of the center and
the left recurrently sought the support of urban workers and small manufacturers
by appealing to class and sectoral interests. These appeals produced the kind of
political polarization and macroeconomic policy outcomes predicted by the partisan-
conflict model outlined above. In Colombia and Venezuela, by contrast, such
conflicts were discouraged by the electoral dominance of broadly based patronage
parties. In Uruguay, the traditional Colorado and Blanco parties also tended to
discourage class and sectoral conflicts that lead to expansionary macroeconomic
policies, though by the mid-1960s, the influence of these parties had come under
challenge from a coalition of center-left parties with strong bases of support in
Montevideo.
Mexico provides an important example of the significance of institutions in
determining the ability of new urban-industrial groups to formulate effective
demands on the state. Under the leadership of President Lázaro Cárdenas in the
1930s, the ruling Partido Revolucionario Institucional (PRI) encompassed peasant,
middle-class, and working-class organizations. Mexico experienced structural
changes comparable to those in Brazil and Argentina in the 1950s and 1960s,