Introduction

Through the mid-2000s, observers of labor markets in Latin America generally agreed that performance in recent decades had been disappointing, for some, in fact, “perhaps the greatest disappointment of the new development strategy” (Berg et al. 2006, 1). This disappointment is not restricted to social scientists, as public opinion surveys “confirm that employment is people's primary concern in almost all countries” (Pagés, Pierre, and Scarpetta 2009, 1). Employment levels picked up during the 2000s, but often in low productivity activities or what a World Bank study called “growthless jobs” (Pagés et al. 2009, 2).

However, the diagnoses and resulting policy prescriptions for how to fix labor markets vary greatly. For the International Labour Organization (ILO), for example, a core problem is informality, which accounts for about half of all employment and half of new jobs created in the 2000s. A central policy recommendation is therefore for more and better enforcement as well as “social dialogue” among representatives of workers, employers, and the government (ILO 2006, 12, 19; see also IDB 2003, 118, 277). Others, in contrast, blame rigidity and over-regulation of labor markets and its “many undesirable side effects,” and call for deregulation and more flexibility (World Bank 2004a, 35, 37–38). Another group focuses on comparatively low levels of education and skills. These studies usually recommend greater investment in education as well as additional policies to reform training institutes (IDB 2003, 276), to expose firms to greater competition (de Ferranti et al. 2003, 9), or promote diffusion of information on the high returns to education (Menezes-Filho 2003, 143).

Argentina

1. Jaime Campos. Director, Asociación Empresaria Argentina, 19 September 2007 and 12 December 2008.

2. Daniel Funes de Rioja. President of Coordinadora de las Industrias de Productos Alimenticios (COPAL) and board member of Unión Industrial Argentina (UIA), 28 July 2010.

3. Marshall Gaylord. Industrias Lander, 19 September 2007.

4. Claudia Jacinto. Researcher at Instituto de Desarrollo Económico y Social (IDES), 23 July 2010.

5. Marta Novick. Ministry of Labor, 23 July 2010.

6. Dina Pesce. Staff member, American Chamber of Commerce, 29 July 2010.

7. Santiago Soldati. President of Sociedad Comercial del Plata (SCP), 18 September 2007.

8. Gerardo Soula. Director of human resources for Latin America, Cargill, 12 December 2008.

9. Enrique Zuleta Puceiros. President, Fundación de Investigaciones Económicas y Sociales, 18 September 2007.

Brazil

1. Roger Agnelli. President of Vale 2001–11, 14 September 2011.

2. Glauco Arbix. President, Financiadora de Estudos e Projetos (Finep), 4 July 2011.

3. Juliana Bonomo. Head of education, Valer, Vale, 17 November 2008.

4. Andrea Calabi. Former secretary of planning in São Paulo and former head of Receita Federal, 4 August 2006.

5. Carlos Henrique Brito Cruz. Scientific Director, Fundação de Amparo à Pesquisa do Estado de São Paulo (FAPESP), 14 November 2011.

6. Ana Lucia Caltabiano. Director of human resources for Latin America, Hewlett Packard, 14 September 2007.

7. Fernando Henrique Cardoso. President of Brazil 1994–2002, former senator and finance minister, 16 August 2010.

8. Carlos Alberto Cidade. Diretor of regulatory policy, Oi and former head of legislative action, Confederação Nacional da Indústria (CNI), 1 July 2011.

9. Deisi Difune. Advisor, Serviço Nacional de Aprendizagem Industrial (Senai), 17 June 2009.

10. José Ermírio de Moraes Neto. Board member and heir, Votorantim, 9 December 2005.

11. Rodolfo Fischer. Executive vice-president, Banco Itaú, 3 August 2006.

12. Patricia Freitas. Head of venture capital at Financiadora de Estudos e Projetos (FINEP), 4 July 2011.

13. Daniel Gleizer. Head of macro analysis, Unibanco, 2 August 2006.

14. Francisco Gros. President of Fosfertil and former president of BNDES, 8 December 2005.

15. Horacio Lafer Piva. Former president, Federação das Indústrias do Estado de São Paulo (FIESP) and board member, Klabin, 14 September 2007.

16. Luiz Mello. President, Instituto Tecnológico Vale, 18 October 2011.

17. Nanci Meneghetti. Director of human resources, Itautec, 15 June 2009.

18. Vladson Menezes. Director of legislative affairs, Confederação Nacional da Indústria (CNI), 30 June 2011.

Introduction

Analyses of liberal, coordinated, and most other varieties of capitalism focus on large national firms. In Latin America, such a purely domestic focus would miss major players; in most countries, MNCs constitute a third to a half of the largest firms. In terms of complementarities, MNCs often have patterns of interactions with other firms, workers, and governments that do not resemble patterns of domestic business groups. MNCs cannot be assumed to be “institution takers” that come to countries and blend into the corporate landscape (Pauly and Reich 1997).

Debates continue about whether and how MNCs contribute to host country development, human capital, and technological progress. Although more radical views, for and against, persist, a more nuanced middle ground contends that the impact of MNCs depends on the context and that “the search for universal relationships is futile” (Lipsey and Sjöholm 2005, 40). The range of relevant contextual factors is wide, but generally, FDI is more likely to have positive effects in an economy characterized by more-developed financial markets (Alfaro et al. 2004), more technologically advanced local firms, more competitive markets (both locally and internationally), fewer restrictions on FDI flows, and higher stocks of human capital (Moran, Graham, and Blomström 2005). This range of contextual factors begins to shade into the core complementarities in the literature on varieties of capitalism, and this chapter thus takes the contextual analysis a step further to analyze how MNCs fit into hierarchical capitalism.

Introduction

While pushing the notion of a single ideal type of hierarchical capitalism for Latin America, previous chapters also noted exceptions and deviations. This chapter takes the analysis of variation a step further by examining recent trends in four countries. Mexico (Colombia could be included as well) offers a benchmark of continuity on all four dimensions of hierarchical capitalism: business groups, MNCs, segmented and atomized labor markets, and a low-skill equilibrium. Argentina, in contrast, starts to move away from the ideal type in the 1990s (with the demise of many business groups), and in the 2000s, the Kirschners’ heterodox economic policies and support for labor unions furthered the trend. Brazil and Chile appeared by the 2000s to have the greatest potential for escaping the middle-income trap in part by using technology and education policy to counter the negative complementarities of hierarchical capitalism.

Sources of intraregional variation are many, ranging from colonial legacies (Mahoney 2010), to geography (Engerman and Sokoloff 2012), to contemporary economic and political trends, the focus of this chapter. At the start of the twenty-first century, two major trends – the boom in natural resources and the leftward shift in politics – buffeted the region, although variably across countries. For example, by the late 2000s, international demand for exports was putting countries of the region on two separate tracks. Stagnation in the United States depressed exports and growth in Mexico, Central America, and the Caribbean, while booming Asian demand for food and minerals fueled higher growth across most of South America (Izquierdo and Talvi 2011).

Some years ago I thought it would be interesting to write a paper mapping the “varieties of capitalism” framework onto contemporary Latin America to see what might be gained. Quite a bit, it turned out, which started me on a much longer engagement, initially with the pathbreaking work by Peter Hall and David Soskice, and then beyond with the broader and growing field of comparative capitalism.

Nearly all of this field is preoccupied with distinctions among developed countries, especially liberal and coordinated economies, with occasional reference to Asia but little or nothing to the rest of the world, including Latin America. At a minimum, I thought, here was a golden opportunity to connect Latin America back to these innovative debates on comparative capitalism. The lingua franca in this field includes terms like “institutional complementarities,” “patient capital,” “firm-specific skills,” and “interfirm coordination,” as well as a host of other concepts that can illuminate analyses of the political economy of Latin America and then link these analyses back to comparisons with the wider world.

Introduction

For a number of years now, scholars of comparative political economy have been asking how many types of capitalism exist in contemporary societies. To date the most common answers – based almost exclusively on comparisons among developed countries – are one, two, three, four, five, or many. The answer offered here is four, based primarily on ideal types constructed around four basic mechanisms of allocation that are compatible with various ways of organizing capitalism: markets, negotiation, networks, and hierarchy.

For those seeking a more inclusive and exhaustive taxonomy of capitalisms, the lament over Hall and Soskice's (2001) original dichotomous formulation was that it was too inductive, empirically complex, and geographically narrow (only developed countries). However, even their original formulation contained hints for possible extensions. For one, their category of coordinated capitalism lumped together two different subtypes, Japanese and European CMEs, that operated on distinctive principles: group-based versus industry-based coordination, respectively (p. 34). Moreover, they speculated that some countries of southern Europe might be hybrid “Mediterranean” varieties, with more coordination on the capital side and more markets for labor. However, these possible subtypes remained undeveloped.

Introduction

In 2006, Andrés Benitez, the rector of the Universidad Adolfo Ibáñez, wrote an op-ed column, titled “Why the Papelera is not Nokia,” in the Chilean news magazine Capital (Benítez 2006). The column noted that Nokia, like la Papelera (the nickname for the Compañia Manufacturera de Papeles y Cartones, CMPC, of the Matte Group), had started in forestry, pulp, and paper, but that Nokia had invested heavily in R&D and shifted out of forestry. Nokia's investment in telecommunications, over many years and drawn from profits in other Nokia subsidiaries, allowed Nokia in the 1990s to lead the first boom in cellular phones (see also Sabel 2009). La Papelera, in contrast, had no strategy, according to Benitez, for using innovation and R&D to work its way out of forestry. Several weeks later, Capital published a response article by Bernardo Matte, one of the scions of the Matte family, that defended CMPC's investment in forestry (Matte 2006). Matte wrote that Nokia was no longer competitive in forestry and did the right thing in moving into other sectors. But, CMPC was still the lowest cost producer in the world and was investing in R&D in forestry to keep it that way, so the Matte group saw no reason to invest in other sectors.

This exchange was revealing on multiple levels. Business groups have a diversified structure that makes them, in principle, ideally suited to lead diversification out of commodities and low value added activities, as Nokia and many Asian business groups have done. As noted in Chapter 3, some groups are more predisposed to new ventures and higher-technology activities (or states pushed them in that direction). The Matte group fits best in the category of the less specialized, less innovative portfolio-type of business group. The exchange over La Papelera also illustrates at least implicitly the effect of the commodity boom on more conservative business groups. When commodity prices are sky high, the irresistible incentive for business groups is to invest more in these commodities, thereby reinforcing their structure, strategy, and relative absence of R&D. The Votorantim group in Brazil also expanded investments in forestry at the same time it closed down its subsidiary in venture capital (see Chapter 8).

Introduction

In 1980, the largest private domestic firm in Mexico, Banamex, was a sprawling, highly diversified (with dozens of subsidiaries), closely owned, and family-controlled business group, also known as a grupo económico or just grupo. Twenty-five years later, the Banamex group was long gone, and many observers expected that decades of profound economic and political liberalization would have transformed the rest of the corporate landscape as well. Yet, by the mid-2000s, the largest private firm in Mexico, and for that matter in all of Latin America, the grupo Carso, was a similarly sprawling, widely diversified (nearly 200 subsidiaries), family-controlled business group (Grosse 2007). The names may change, but the corporate form lives on. Similar comparisons could be made for the other large countries of the region. In fact, for the last 50 years, scholarship on large domestic firms has consistently documented the dominance of family-owned, diversified business groups (Schneider 2005).

In the absence of deep equity and credit markets, business groups, along with MNCs, have been the main private institutions for mobilizing large-scale investment. Latin America businesses could not finance investment through domestic bank finance (as in CMEs) or stock markets (as in LMEs) and relied instead on retained earnings, international loans, or loans from state agencies (see Figure 3.1). By one estimate, even companies listed on the Brazilian stock exchange relied on retained earnings for about 75 percent of their financing needs (Claessens, Klingebiel, and Lubrano 2000). Early analyses of business groups emphasized their crucial role in pooling capital and acting as internal capital markets (Leff 1978). Moreover, individual and institutional investors and banks did not own large enough shares to get on boards (save pension funds in a few companies in the 2000s). Markets for corporate control did not exist, and business groups passed instead within families from one generation to the next.

Introduction

The previous chapter analyzed some of the complementarities – such as those with the large informal sectors and short tenure – that discouraged investment in skills. This chapter elaborates on these institutional complementarities and adds in others to analyze the dynamics of a low-skill equilibrium. A sustained examination of skills is essential theoretically to establish the links and complementarities between the firm strategies analyzed in Chapters 3 and 4 and labor market dynamics. Close analysis of skills is also indispensable in practical and policy terms as skills and human capital set the parameters for possible development strategies as well as for the longer-term potential for more equitable development.

For some years, it has been a matter of settled consensus that investment in education and human capital is essential for economic development. However, on the issue of how to increase human capital, research and policy recommendations focus almost exclusively on the supply side. It is, of course, important to increase funding, improve instruction, modernize curricula, and revitalize schools and educational administration, but these efforts are not likely to meet with intense student demand for education if good jobs that require their skills are not waiting at the other end. As a report from the Inter-American Development Bank put it, “policies aimed only at improving the supply of educational services will likely fail to improve young individuals’ school attainment” (Duryea, Edwards, and Ureta 2003, 18). Alice Amsden (2010) goes further and deems the overemphasis on investing in human capital a mistaken application of Say's Law (that supply creates its own demand) and a sort of “job dementia” in its neglect of complementary policies to create jobs for newly educated entrants into the labor market.

Introduction

Beyond economic complementarities, the main focus of Part II, politics and political institutions are decisive in the evolution of all varieties of capitalism. Various forms of state intervention that establish the foundations for the economic institutions – from training programs to competition agencies – depend on active, continuing support from political coalitions (Thelen 2001). In the case of hierarchical capitalism, business groups and labor unions used their political advantages to press for policies and institutions that reinforced institutional complementarities and favored insiders. At the same time, the politics and strategies of these insiders depend on their preferences that, in turn, are fundamentally shaped – in hierarchical and other types of capitalism – by the complementarities they face in the economic sphere. This chapter analyzes the politics and institutions that favor insiders and continuity. However, reformers and outsiders have cause to continue to use politics to challenge the negative complementarities examined in previous chapters. Chapter 8 considers the politics of these challenges and some efforts to escape from the negative complementarities of hierarchical capitalism.

A number of perspectives – crony capitalism, entrenchment, and rent seeking, not to mention Marxist arguments (instrumental and structural) – would expect big business to dominate policy making – especially economic and social policy. In the entrenchment (Morck, Wolfenzon, and Yeung 2005) and crony capitalism views, business groups in developing countries maintain their privileged positions and favorable regulations by virtue of close ties to sympathetic political leaders. Among other things, weak institutions, the huge size of business groups, and venal politicians favor entrenchment. The rent-seeking view, more theoretically elaborated by Olson (1982) and followers, reaches fairly similar conclusions; however, business-group dominance depends more on the organization of special-interest groups and less on the venality of politicians.

Introduction: Perspectives and Arguments

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 1990 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.

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 (Gereffi, Humphrey, and Sturgeon 2005), natural resource curses (Karl 1997), and other macro perspectives on debt and international capital flows (Maxfield 1997). 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.