Brazil and Ecuador: Similar Political Institutions, Different Policy Outcomes


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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

From The Brookings Institution

Why have Brazil and Ecuador with similar electoral, partisan and presidential institutions produced significantly different policy outcomes?

These two countries are conventionally known as having highly fragmented party systems where legislators have strong incentives to cultivate a personal vote. Presidential powers in these two countries are strong and the presidents often make use of government resources to advance their agendas.

Yet, policies in Brazil respond better to shocks and are more stable over time in contrast to policies in Ecuador, which remain vulnerable to political changes and realignments. This distinction can be explained by the different nature of political coalitions formed in each country. For these two countries, there are three factors that increase executive power to craft and manage governing coalitions: the availability of valuable coalition currencies, the influence of long-term political horizons and the extent to which political transactions are credibly and effectively enforced.

Since their democratic transitions in the early 1980s, Brazil and Ecuador have developed unique policymaking patterns that have led to different policy outcomes. The high level of party fragmentation in both countries affected their respective presidents’ abilities to have single-party majorities in the legislatures. To advance their policy agenda, presidents relied on strong constitutional prerogatives to dictate legislation and veto policies. They cemented strong and effective political coalitions by exchanging local rewards to individual legislators and political parties. However, the concentration and influence of presidential powers in these two countries have produced contrasting governance incentives.

In Brazil, it allowed presidents to overcome political opposition and cement the road to good governance. Not only were succeeding Brazilian governments able to overcome the hyperinflation that crippled the country’s economy in the late1980s, but they also implemented a package of economic reforms. For example, the implementation of the 1994 Real Plan helped Brazil achieve low inflation and maintain macroeconomic discipline, which led international rating agencies to rank Brazilian debt as “investment” grade in 2008.

In contrast, Ecuador’s strong presidential powers were not sufficient enough to promote policy change. Instead, it created greater inter-branch conflict and policy deadlock. A sequence of erratic monetary policies combined with a financial and fiscal crisis in the late 1990s led to a debt default and an unexpected adoption of a dollarized regime in 2000. Although the economy stabilized in subsequent years, Ecuador’s economic outlook remained largely dependent on volatile oil revenues and pro-cyclical spending patterns. This lack of consistent and sound economic policies has negatively impacted Ecuador’s investment ratings.

The cases of Brazil and Ecuador illustrate that good politics can lead to good policies. The success of the Real Plan provided Brazilian presidents Cardoso and Lula with high approval ratings and both presidents were re-elected. In Ecuador, intense inter-branch conflict led to policy deadlock and eventually contributed to the legislative ousting of three consecutive presidents between 1997 and 2005. This stark difference in policy outcomes is also supported by an independent survey of country experts and policymakers in Latin America. The survey shows that policies in Brazil are more likely to adapt to shocks than policies in Ecuador. Policies in Brazil become more stable over time. However, existing policies in Ecuador tend to be hard to change even in the face of external shocks; changes to policies unilaterally pushed by the executive tend to remain vulnerable to subsequent political realignments (IADB 2006).

Understanding the difference in how political coalitions are formed in Brazil and Ecuador is critical in explaining the different policy outcomes of these two countries. In re-democratized Brazil, coalition-making moved from an ad hoc, largely clientelistic and dysfunctional pattern of cooperation in the 1980s to a more “programmatic” and institutionalized type of exchange in the 1990s (Hagopian et al. 2009). By contrast, coalitions in Ecuador moved from a clientelistic yet functional pattern of clandestine exchanges to an even more fragmented pattern of shifting coalitions, which increased presidential instability after 1996.

This difference in coalition-making can be explained by three institutional dimensions that affect the formation and maintenance of reform coalitions: the availability of coalition incentives between presidents and legislators, the political ambitions of policymakers and the extent to which political deals and agreements among coalition partners are credible and effectively enforced by third party agents. More transparent coalition incentives, longer-term horizons for politicians and enforceable checks and balances can effectively lower political transaction costs and facilitate cooperation over time. By contrast, restrictions on available currencies, term-limits and non-credible commitments negatively affect the formation and duration of political coalitions.

The distribution of these institutional arrangements in Brazil and Ecuador and their impact on the strategy of politicians and the policy outcome. In Brazil, there are incentives for policy stability and adaptability as a consequence of the institutionalization of cooperative games between executive and legislators. However, in Ecuador, the perpetuation of informal and sometimes dysfunctional cooperation can lead to policy rigidity or volatility.[1]

In Brazil, presidents were able to provide conditional cooperation incentives to parties and legislators through the allocation of cabinet positions, and the distribution of pork barrel projects and other selective benefits. In Ecuador, such coalition currencies were gradually eliminated in the context of anti corruption reforms after 1995, thus eradicating the few incentives available to cement political cooperation between presidents and legislators. Brazilian legislators had greater incentives to become reliable coalition partners over time given that they had larger time-horizons. On average 70 percent of incumbents run for reelection in Brazil and about 66 percent of those that run for reelection have been reelected.

On the other hand, in Ecuador, legislators had short-term horizons due to the presence of term limits between 1979 and 1996; only 30 percent of Ecuadorian legislators stayed in office after restrictions were banned in 1996. In Brazil, the presence of an independent judiciary to enforce and sanction policy agreements helped stabilize the cost of coalitions and raised the costs of defection. In Ecuador, the judiciary and constitutional tribunal were highly politicized and the appointment of magistrates became part of the coalition bargaining itself. Therefore, there were no impartial mechanisms to enforce cooperation or punish defections.

Thus, the combination of available coalition currencies, the expanded time horizons of policymakers and the credibility of institutions to enforce agreements enhanced the value of legislative coalitions and contributed to improved policy outcomes in Brazil but less so in Ecuador. This comparison has helped illustrate the presence of decisive variables explaining differences in policy outcomes in these two Latin American countries with similar political institutions.

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