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What Kind of Capitalism?

By Ben Ross Schneider
An excerpt from the book Hierarchical Capitalism in Latin America

Ben Schneider

Ben Ross Schneider is Ford International Professor of Political Science and director of the MIT Brazil program.

IN THE MANY intense debates over development in Latin America in recent decades, the question rarely arose, as it had in previous decades, as to what kind of capitalism existed or whether capitalism in Latin America was somehow different. If anything, the homogenizing Washington Consensus of the 1990s sidelined such queries with expectations that market reforms would soon make the economies of Latin America resemble liberal economies elsewhere. Market reforms and globalization have transformed many aspects of capitalism in Latin America, but areas of convergence are often, as elsewhere, less interesting and less consequential for development than are the areas of continued divergence. So, it is worthwhile to raise again the question of what sort of capitalism exists in Latin America.

Hierarchical Capitalism in Latin America

Hierarchical Capitalism in Latin America, by Ben Ross Schneider. The excerpt was reprinted with permission from the author.

Most attempts to characterize the political economies of Latin America as somehow distinctive can be roughly classified as internationalist or statist. The former was famously staked out in various dependency arguments of the 1960s and 1970s that claimed that international economic ties created a stunted form of capitalism with limited possibilities for autonomous development. The internationalist perspective later resurfaced in several guises including global production networks, natural resource curses, and other macro perspectives on debt and international capital flows. Internationalist perspectives are indispensable in some places (such as oil exporters or export zones) or some periods (such as the debt crisis of the 1980s), but these are only partial views because they miss most of the domestic political economies of the rest of the region in more normal times.

By the 1980s, the mainstream focus shifted to the domestic economy and emphasized comparisons across development strategies (import substitution vs. export promotion) and the variable role of the state, often invoking revealing comparisons between Latin America and East Asia. After 1990, research on the political economy of Latin America mostly concentrated on the changing role of the state, especially during market reforms of the 1990s, but then on into the 2000s with attention to social welfare, the new left, and various forms of renewed state intervention. Of course, not all past work in political economy fits the division between internationalist and statist, but little research, save specialized publications, asked whether there was something distinctive about the domestic private sector.

Much of the recent statist bias is fully warranted as shifts in the role of the state in Latin America have been epochal. However, the statist perspective tends to overstate the extent of change and to obscure the pivotal economic agents—firms and workers—that are driving development in the wake of state retrenchment in the 1990s. Key questions—such as: Why is education so low? Why has productivity not increased? Why have good jobs been so scarce? and Why do firms not invest more in research and development?—cannot be answered in a statist framework and require instead an analysis of the types of firms, labor markets, corporate strategies, and skill regimes that constitute the institutional foundations of capitalism in Latin America. Moreover, recent scholarship on change, in policies and development models, has missed significant continuities in patterns of organization and behavior by business and labor.

This book starts with business and labor and develops four main hypotheses: (1) that Latin America has a distinctive, enduring form of hierarchical capitalism characterized by multinational corporations (MNCs), diversified business groups, low skills, and segmented labor markets; (2) that institutional complementarities knit together features of corporate governance and labor markets and thus contributed to the resiliency of hierarchical capitalism; (3) that elements of the broader political system favor incumbents and insiders who pressed governments to sustain core economic institutions; and (4) that hierarchical capitalism has not generated enough good jobs and equitable development nor is it, on its own, likely to.

Developing these arguments requires a new approach to the study of Latin American political economy. Theoretically, drawing on the literature on comparative capitalism and especially varieties of capitalism (Hall and Soskice 2001), the analysis brings three main innovations. First, it uses a "firm's–eye" focus on the structure of corporate governance and labor markets and on the predominant economic strategies of firms and workers. Second, it examines interactions across realms of the economy. The separate literatures on business groups, MNCs, labor markets, and skills are large, but they rarely overlap or speak to one another. This book tries to link them. Third, I use the economic strategies of firms and workers, and the institutional complementarities that animate them, to reinterpret the sources of policy preferences and political strategies of business and labor. Again, existing research on business and labor politics is extensive, yet it rarely connects political activity back to firm strategies and institutional complementarities.

The best way to answer the question of what kind of capitalism Latin America has is to compare it to other varieties, especially liberal market economies (LMEs) in the United States, Britain, and other Anglo economies; coordinated market economies (CMEs) in Northern Europe and Japan; and to other developing economies. These broad comparisons help pinpoint the distinctive configuration of hierarchical capitalism. Within this comparative framework, my focus is primarily on Latin America, especially the larger countries of the region, but hierarchical capitalism is not just Latin capitalism. The model should also apply, with modifications, to other middle–income countries outside the region, such as Turkey, Thailand, or South Africa.

This book draws on a long tradition of comparative institutional and historical institutional analysis, but with a crucial shift in analytic focus to incorporate firms and organizations. Following Douglass North, many institutional approaches have assumed organizations such as firms and paid them little heed. North insisted on a "crucial distinction" between institutions and organizations: "institutions are rules" of the game and firms and other organizations are merely the "players." The implication, followed in most institutional analysis in political economy, was to concentrate primarily on the rules and neglect organizations that were assumed to adapt more or less automatically to the rules. My focus instead problematizes firms and makes them core components of an institutional approach to Latin American political economy. Organizations in Latin America—from the Church, to state–owned enterprises, to business groups—have always been hybrid, syncretic, complex, interrelated, and politicized, and understanding them requires the full analytic toolkit from comparative institutional analysis.

Core institutions of hierarchical capitalism

What are the institutions in Latin America that organize investment, labor, technology, and skills into an overall production regime? The comparative capitalism framework for developed countries gives a guide on where to look, but that framework cannot be imported wholesale. On the side of capital and investment, scholars of developed countries start with capital markets—banking systems and stock markets—and the myriad rules and practices that regulate them. However, in Latin America, equity markets and banks were not the sources of long term productive investment (nor were they markets for corporate control). Instead, the private institutions (as organizations) that mobilized capital for investment were business groups and MNCs. In terms of strategic interactions, CEOs in developed countries are usually preoccupied with managing relations with stock markets (quarterly earnings and guidance, institutional investors, etc.) in equity–based financial systems or with bankers in bank–based systems. In contrast, managers in hierarchical capitalism are most keenly attentive to relations with family owners in business groups or with headquarters in MNC subsidiaries. Most research on corporate governance, narrowly conceived, examines relations between financial principals (shareholders or creditors) and their managerial agents; in hierarchical capitalism, these external financial principals have little leverage over managers.

Similarly, scholars of labor in developed countries focus on overall regulations, collective bargaining, and employment practices. Such a focus in Latin America would underscore the high levels of regulation, but it gets only part way because almost half of jobs are informal and not subject to formal regulation. Moreover, employment practices point less to long–term relations (save for a few) as in Japan and Germany but rather to very short–term employment. For lack of a better term, I use the shorthand of atomized labor relations and segmented labor markets to characterize the result of this complex institutionalized mix of formal regulations and informal practices. On skills, the institutions in Latin America resemble those in developed countries, and the overall skill regime comprises basic education, technical education, universities, public training programs, unemployment insurance, regulations on company spending on training (compulsory in–house training, tax incentives, etc.), and general private practices on training.

Capitalism in Latin America might first be characterized simply by weak or missing formal institutions: undeveloped financial markets, unenforced labor regulations, and shallow and partial coverage by the skills regime. One could then write, as others have, about how and why these institutions are weak and develop a comparison of weakly versus strongly institutionalized varieties of capitalism. My approach is less concerned with standard formal institutions —and how and why they lack force— and focuses instead on the organizational and behavioral responses to weak or absent institutions, namely, diversified business groups, MNCs, segmented labor markets, and a low skill regime. Thus, business groups and MNCs mobilized capital without stock markets or banks. Unlike firms in other varieties of capitalism whose strategies were conditioned by bank–centered or equity–centered financial systems, business groups and MNCs are freer from these constraints, and thus, their internally generated strategies and behaviors are more consequential for development outcomes (hence the importance of organizations or institutions in corporate governance).

In labor markets, the responses to unevenly enforced regulations and limited training and education were segmented labor markets, atomized labor relations, and low skills. These responses are not recognizable organizations such as business groups, but rather are dispersed, though regular, patterns of behavior. However, these patterns of behavior in informality, in school leaving, and in high job rotation are enduring, and shape long–term expectations of workers and managers and, as such, constitute themselves informal institutions that regulate labor markets in the absence of formal rules. By analogy, albeit it imperfect, much of the comparative institutional literature looks at the mold (the formal institutions and rules that shape behavior) whereas I focus more on the object that emerges with only a partial mold (behaviors and organizations in the absence of constraining formal institutions). However, the end goal of each approach is the same—to explain the strategic interactions and behaviors of owners, managers, and workers.

Massachusetts Institute of Technology