Building Institutional Capacity for Inclusive Development in Latin America


    The recent scandals in a number of Latin American countries raise the issue of institutional capacity and the vexing issue of what is at the root of state incapacity in Latin American countries, particularly in those cases that have made recent significant progress in reducing poverty. This blog entry argues that there are long-standing historical and structural conditions that make corrupt practices extremely resilient. The reform of formal institutions will not be effective unless it is accompanied by efforts to grapple with those underlying conditions.


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    Last week I participated in a panel held at the University of Toronto on Latin America’s receding “pink tide”—the declining public support for various left/centre Latin American regimes. The topic of the region’s recent corruption scandals was on the agenda both as a central factor in the political difficulties faced by the political left and as an issue manipulated by the political right to increase public disillusionment with left/centre regimes. 

    Whatever one believes about the political aspects of these scandals, it is undoubtedly true that stable and well-functioning institutions are necessary ingredients in sound development policies. Indeed, “state capacity” was a fundamental ingredient in the economic growth, low inequality, and improved social welfare in such countries as South Korea and Taiwan. However, while institutional arrangements are always a key part of any development story, the more important question might be this: what are the underlying conditions most likely to produce effective state institutions? How do countries build institutional capacity?  

Reforms to Formal Institutions are no Panacea

    Reforms to formal institutions will not be effective without efforts to address the underlying processes and conditions that contribute to institutional incapacity. Official development thinking, particularly that emanating from the World Bank, has missed this crucial point. Framed as measures to produce “good governance,” the Bank has called for anti-corruption legislation along with the reform of Latin American judiciaries and civil services. Indeed, the importance the Bank attaches to tackling corruption is reflected in the fact that it is one of the Bank’s six governance indicators. The Bank assumes that poor governance and weak institutions have led to the misallocation of resources, excessive government intervention, arbitrariness, and corruption, and these, in turn, have slowed private sector investment, economic growth, and poverty-reduction. The influence of the Bank’s thinking has been substantial, extending well beyond the official development community. Witness the proliferation of scholarly literature on state, judicial and police reform in Latin America. 

    Institutional weakness, a long-standing challenge in Latin America, is closely linked to the highly unequal distribution of political power in countries—an inequality that has always had a profound impact on institutional development. This inequality has often produced sharp political polarization. As I argued in Social Forces and States, Poverty and Distributional Outcomes in South Korea, Chile, and, Mexico (Stanford University Press, 2012), formal and informal institutional arrangements are heavily influenced by powerful social actors. These actors, in their efforts to protect their interests, often operate in ways harmful to effective institutional functioning. Indeed, in Latin America, powerful social actors have sabotaged, if not destroyed, institutional structures when these were perceived as threatening.  

    Below I outline some of the key underlying challenges that must be addressed if institutions are to function effectively in improving human welfare. 

The Need for a Broad Societal Consensus on Key Issues

    Political institutions will not operate effectively unless there is a shared understanding of their purpose and operation and widespread support for the idea that they must operate in a particular way. This does not currently exist in most Latin American countries. 

    Latin Americans disagree on the very meaning of democracy. Survey research has demonstrated this schism as has my own qualitative research. Many Latin Americans believe that democracy is mostly about procedure (elections, due process, media freedom). For others, however, democracy is about actual policy outcome, particularly improvements in social well-being. For these citizens, democracy also means actual civil society participation in the development of policy. Regimes that fall short on these latter criteria, fail to garner the respect of those citizens who understand democracy as social justice and direct citizen involvement.  

     Despite the decline in poverty over the past decade, we need to remember (as many Latin Americans surely do) the severe social deprivation that occurred during the 1980s, and extended into the early part of the twenty-first century. Elected governments that pursed market liberalization, failed to meet public expectations for improved living standards—a fact that likely contributed to the erosion of the legitimacy of parties and political institutions documented in survey research. During the hey-day of market liberalization, governments came to be perceived as pursing policies that benefitted powerful economic interests. Civil society organizations were strongly critical and demanded greater involvement in policy. My own research on Mexico and Chile found considerable resistance on the part of governments to such involvement. Instituting mechanisms of civil society consultation (another one of the World Bank’s governance indicators is “voice and accountability”) will only be meaningful if those in control of the political system agree that it must become an integral part of the political process. At least in Mexico and Chile, an important factor in this resistance to civil society consultation is the product of elite fears that substantive democracy represents a threat to the neoliberal economic model they support. Despite two decades of market liberalization, there remains considerable popular opposition to the basic ideas of neoliberalism. 

    Left/centre governments, critical of neoliberalism and elected on platforms promising significant social improvements, have been faced with a particularly difficult dilemma. They must engage in a delicate balancing act in which they attempt to secure the acquiescence of powerful economic interests—interests that are highly suspicious of such regimes--while addressing pressing social demands. Big business in Latin America has highly effective ways of disciplining policymakers whose policies they oppose. Capital flight has traditionally been one of the most effective among these methods. Faced with this challenge to their political survival, left/centre political leaders are understandably inclined to play the political game as it has always been played, with negative implications for institutional integrity. They are also understandably inclined to make compromises with powerful economic interests.

Playing the Traditional Political Game

    Scandals like the recent ones in Brazil Argentina, and Mexico, are nothing new and are rooted in a variety of historical political structural factors. The desire to gain power and to maintain it requires left/centre leaders win over powerful sources of opposition—in part, they do this through the same methods used by past regimes--by allowing potential opponents and prospective allies, access to state largesse. Joel Migdal’s classic work (Strong Societies, Weak States-State Society Relations and State Capabilities in the Third World, Princeton University Press, 1988) speaks directly to this phenomenon as an essential ingredient in ensuring political survival. Public companies, in particular, play a key role in the co-optation of potentially destabilizing counter elites. The Brazilian Petrobras scandal, involving lucrative kickbacks to top government officials of the state-owned petroleum company, in exchange for highly lucrative contracts granted to the country’s largest construction and engineering companies, reflected the integration of the economic elite with the left/centre political leadership. As Dan La Botz points out, Lula’s and Rousseff’s ability to maintain power, and to achieve some manoeuvrability in improving living standards, involved a carefully constructed alliance that included bankers, realtors, and construction company owners. State owned resource companies, are particularly prone to large-scale corruption given the sudden inflow of wealth during times of commodity booms. 

    At the same time, despite widespread public protests against recent scandals, there is a general societal willingness to tolerate and even participate in corruption. A recent survey of Brazilian public opinion found that 70 percent of those polled said that they would take state illegal benefits if they had the opportunity. For practices to change at all levels of governmental activity, public attitudes will have to become consistently and firmly intolerant of corruption. We need to ask why this has not happened in countries such as Brazil. It is probably helpful to consider what structural conditions (lack of employment, or precarious employment) might be contributing to the resiliency of such attitudes among the Brazilian public. Formal institutional reforms will not accomplish much without changes in public attitudes and without alteration in whatever underlying conditions support these attitudes.  

    Stable, effective, and accountable public institutions arise from broad societal support and trust in their operation. If everyone respects political institutions and agrees that operating in the public realm contrary to prescribed rules is unacceptable, then monitoring and accountability mechanisms will likely be effective. Unfortunately, Latin America’s turbulent history has bequeathed deep political schisms—divisions that often make conflicts appear zero-sum. In such contexts, the exchange of material rewards for political quiescence (if not support) has emerged as an effective means of organizing power for governments of all political leanings. Unfortunately, these practices often extend throughout political institutions. Hence, building institutional capacity must begin with the healing of these historical schisms and the building of trust in political institutions. This is largely a political task and a political process. Without considerable effort in this direction, formal institutional reforms will surely falter.