In this part of the book, we analyze in detail the workings of the main institutions of the policy-making process in Argentina. We show here that these institutions do not facilitate the development of consistent policies over time, the development of policy-making capabilities, the accumulation of policy-making knowledge and expertise, or the coordination of policy. In particular, we show in Chapters 3 through 6 that Argentina's key political actors tend to have short political horizons, wrong incentives, or both, and that Argentina lacks institutional arrangements, such as a professional bureaucracy or an independent judiciary that, in the presence of short political horizons of the key players, would provide the missing institutional glue to facilitate intertemporal coordination and the enforcement of agreements. Chapter 7, then, shows that these institutional features indeed translate in uncoordinated, incoherent, at times rigid, and systematically unstable policy making, features that necessarily lead to low-quality policies and a lack of incentives to invest in capabilities, with the consequent implications for general well-being.

Chapter 3 analyzes the Argentine Congress. In this chapter, we show that the structure of the Congress and the behavior of its legislators reflect equilibrium behavior given the incentives faced by the legislators and their political masters – the provincial party bosses. In particular, we show that given the latter's political incentives, Argentine legislators although professional politicians are only amateur legislators.

We have established in previous chapters several characteristics of the Argentine policy-making environment. Congress is not an important policy arena; presidents tend to have excessive leeway to change policy, except when they face fierce opposition of provincial governors; and nobody has much incentive to invest in long-term policy-making capabilites. Argentina also lacks institutional arrangements, such as a professional bureaucracy or an independent judiciary, that would facilitate enforcement of agreements. These characteristics correspond to what, in the language of Part I of the book, we would describe as a policy-making environment not conducive to cooperation. And, as we established in Proposition 1, a noncooperative policy-making environment can lead to policy volatility, rigid rules, inability to instrument some efficient policy changes, and underinvestment in capacities, all leading to low-quality policies. In this chapter we provide evidence on the characteristics of public policies that fits these predictions.

Previous chapters have already provided some evidence on that regard with respect to policies pertaining to the federal fiscal domain and to civil service policy. This chapter starts with a generic characterization of policies in Argentina, drawing on some international data sets, and then provides vignettes of the process of policy making in some specific policy areas such as international trade negotiations, social policies, pension reform, and regulation of privatized utilities.

This book began with the observation that Argentina's policies have shifted dramatically over time, and with the claim that its inability to produce consistent public policies is the reason behind its economic misfortunes. We argued that the deficiencies of Argentine public policies are the outcome of a policy-making process in which key actors have little incentive to cooperate with one another over time, leading to myopical political and policy choices. Argentina has, thus, been unable to steer a consistent path in crucial areas such as economic, social, or international strategies.

Argentina has a national policy-making environment dominated by executives who tend to have too much leeway to pursue whatever policies they fancy, provided they can buy the support of quasi-feudal provincial governors with fiscal largesse. Such a depiction is somewhat surprising for a country that has a basic constitutional structure with separation of powers quite similar to that of the United States. In spite of a common basic constitutional structure, the workings of political institutions in Argentina couldn't be more different than in the United States. The Argentine Congress is neither the arena where key policies are negotiated nor a very attractive place to develop a political career. The Argentine Supreme Court is not a respected institution with the power to act as a real check on executive power. In Argentina, there is no policy delegation to well-staffed independent professional agencies supervised by Congress through the power of the purse.

This chapter uses the theory of repeated games to study the determinants of policy-making behavior. It provides a game-theoretical connection between elements of the policy-making game and the nature and characteristics of resulting policies. The abstract elements identified in the theory are mapped to observable aspects of political behavior ([4] in Figure 1.1). After identifying basic characteristics of political transactions, developing our basic model, and discussing its implications, we present some extensions that allow for richer characteristics of the underlying policy issues as well as for richer characterizations of the rules of the political game. At the end of the chapter, we discuss the potential empirical application of the framework for different policy issues and in different political environments.

CHARACTERISTICS OF POLITICAL TRANSACTIONS

A number of fundamental features, several of which are amenable to analysis from a transaction cost perspective, characterize the political transactions surrounding public policies. In this chapter, we provide a model that captures six of those features. They are as follows:

1. Intertemporal political exchanges. Politics and policy making take place over time. Decisions are made at different points in time, often by different configurations of actors, and decisions made at any point in time have future consequences.

2. The shifting bargaining power of political actors. Political popularity, coalition formation, and the normal workings of democracy lead to substantial randomness in the power of any political actor over time.

3. […]

A BRIEF SKETCH OF THE FRAMEWORK

We view public policies as the outcome of intertemporal transactions among political actors. Our dependent variable, Y ([1] in Figure 1.1), represents the features of public policies: their stability, adaptability, coordination, and other qualities. The appendix to this chapter discusses these dependent features in more detail.

We explain policies and their features as the outcome of a policy-making game ([2] in Figure 1.1), emphasizing the intertemporal nature of the transactions underlying policy choices and implementation. Formally, let G: X × Z → Y denote the policy-making game, played under the rules of the game X over the issues with characteristics Z, in which the characteristics of policies Y are determined.

The transactions that political actors are willing and able to undertake will depend on the political characteristics of the policy issues under consideration ([3] in Figure 1.1). More specifically, we follow the literature on transaction cost politics in emphasizing some transaction characteristics of policy issues, such as the intertemporal patterns of payoffs for different actors. The vector Z summarizes those transaction characteristics. As in transaction cost economics, different political issues can be characterized by a number of properties. These properties are important in determining the ease of implementing a particular agreement. They include the number and cohesiveness of the political actors involved, the degree of irreversibility of the assets involved in the policy, the intertemporal pattern of payoffs to the actors, the duration of the policy exchanges involved, the ease with which performance can be measured, the observability of shocks, the urgency with which the policy needs to be implemented, and the degree to which the policy benefits broad or narrow interests.

Argentina's sovereign debt default in December 2001 attracted the attention of scholars and policy makers around the world. A country that had a per capita income comparable to Canada's at the turn of the nineteenth century had become an economic disaster 100 years later, with 50 percent of the population living in poverty. Its inability to produce consistent public policies is, we contend, the cause of its economic misfortunes as well as a puzzle that requires explanation.

Argentina's policies have tended to shift dramatically over time. Its aggregate economic policy stance has moved from highly interventionist to extremely promarket and back. After many years of very high inflation and many unsuccessful stabilization attempts, the government introduced a rigid stabilization mechanism known as convertibility in 1991. This mechanism allowed for a reduction of inflation to international standards and resulted in a decade of relative macroeconomic prosperity. But the convertibility regime fell chaotically in early 2002 in the aftermath of the default, leading to one of the worst economic crises in recent world history. Argentine microeconomic policies have also been volatile. The geographical distribution of welfare payments changes as frequently as does the minister in charge of social welfare. Public utility policy moves from promoting private investment in infrastructure to asking foreign investors to leave. And, unlike some of its regional neighbors like Brazil or Chile, Argentina also seems unable to steer a well-defined course in its relations with the rest of the world.

Federalism in general, and fiscal federalism in particular, are crucial axes of Argentina's history, of Argentina's current situation, and of Argentina's possible futures. This paper provides a tour of the recent history of fiscal federalism in Argentina and an overview of its current configuration and main problems.

Federalism is ingrained in the Argentine political system in several ways that are crucial for national policy. Provincial governors are important players in the national game, as they are often party bosses wielding substantial leverage over national politicians via electoral mechanisms and party practices. Provinces are also heavily dependent on central monies for their finances, leading to a particular intertwining of national and subnational politics and policies. This federal connection is, in turn, intertwined with some more general characteristics of the workings of the Argentine policymaking process, which is characterized by the inability to establish and enforce efficient intertemporal agreements. This inability maps into policies that are either too volatile (responding to political opportunism) or too rigid, as a protection against that opportunism. These policy characteristics are particularly salient in the federal fiscal domain.

After a brief description of some general characteristics of Argentina and of its fiscal federalism in Section I, Section II focuses on the relationship between federalism and the market-oriented reform process of the 1990s. The 1989 economic crisis provided the incentives that led to the initiation of the reforms, triggering a series of delegation patterns conducive to the adoption of the reform agenda.

Jacob Viner, the great University of Chicago and Princeton economist, apparently once defined economics as what economists “do.” By this definition, the scope of a field is determined by the subject matter addressed by the theories prevailing in that field. And by this definition, economics has changed enormously during the past four decades, for what economists “do” has been revolutionized.

Someone entering the study of economics in the 1950s, when I did, would have found a modest theory of consumer spending on goods in the marketplace, a theory of profit-maximizing firms and market equilibrium under competition, monopoly, and other market structures, a theory of the demand for labor and capital based on given production functions and factor prices, and a rudimentary theory of public choice where governments tried to maximize “social welfare.”

Many of the most interesting social and economic issues were left out, perhaps to be studied by sociologists, political scientists, and psychologists. Economists failed to recognize that men and women not only buy apples and cars, but they also have children, rear and educate them, marry and divorce, buy luxury goods to gain prestige, take care of elderly parents without direct compensation, smoke and drink heavily, engage in crime, and discriminate sometimes viciously against blacks, Jews, women, and others.