Fighting Past Economic Wars: Crisis and Austerity in Latin America

Abstract

Political economy theory expects that changes in macroeconomic governance are often catalyzed by institutional factors, such as partisanship, elections, or IMF conditionality. I challenge and contextualize this view by incorporating the role of technocratic advisors into a domestic policymaking framework. I contend that presidents from countries with crisis legacies are more likely to appoint mainstream economists that pursue budget discipline. Employing an originally constructed dataset, the Index of Economic Advisors, I conduct an econometric test of 16 Latin American countries from 1961 to 2011. I find that politicians are most likely to appoint mainstream economists who embrace fiscal rectitude in countries with inflation-crisis legacies. Furthermore, these crisis legacies are sticky given the severity of inflationary trauma relative to other types of domestic economic volatility in Latin America. In fact, these effects hold when controlling for both historical and contemporaneous shocks to unemployment.

Keywords: Political Economy, Development, Austerity, Latin America, Economic Crises, Political Psychology, Technocrats, Fiscal Policy, Macroeconomic Policy

JEL Classification: B22,E31, E60, E62, E65, H30, H60, N16, O54, O57