Fiscal issues - Introduction: Guiding questions for this chapter

Fiscal issues

  1. US: fiscal federalism takes off because of increased national resources generated through federal income tax and redistributed to the states

  2. Mexico: national fiscal resources increasingly concentrated in central government and in presidency

  3. Brazil: financial resources remain concentrated in hands of central government and the presidency, transcending shift from dictatorship to democracy

  1. Divergence in responding to the issues of governance in the post-War period

Peace on the international front meant relatively more attention and weight was placed on domestic matters in each of the three countries after the Second World War. In response to local issues, the federalism practiced in Brazil, Mexico and the US diverged dramatically, to such a degree that it was nearly unrecognizable in Mexico, while in Brazil the balance of power between the state and the federal government oscillated between decentralization (1946-1964 and 1985-present) and centralization (1964-1984). In contrast, in the United States where a democratic regime was consolidated, the logic of federalism went hand in hand with the presidential republic written into the Constitution. The issue in the latter case was how power was to be shared between the federal and the state governments and the proper balance between national and local authority.
    1. Political relations

      1. US: consolidation of centralization patterns

The United States entered the post-war world with a strong federal government in which the mainspring of the system was the Presidency. The war-time powers concentrated in the federal executive, to ensure coordinated military action abroad and economic policy at home, quickly gave way to what became known as the Imperial Presidency, under the impact of the Cold War and the conflict with the Soviet Union. The competition with the Soviet Union for hegemony throughout the globe necessitated coordinated security policy and economic policy, behind which stood bipartisan cooperation in Congress. On the home front the consensus built by Roosevelt continued, with its emphasis on the role of the federal government in advancing economic and social policy until the 1960s, the high point of which was the inauguration of the Kennedy Administration and its vision of an America inclusive of all and hegemonic abroad in its benevolent use of power.

The crisis produced by the assassination of Kennedy and the worsening of the Vietnam conflict, however, triggered a realignment of political and social forces in the country. The troubled presidency of Lyndon Baines Johnson (November 1961-1968), which followed, made manifest the increasing divisions within American society over the role of the federal government as an agent of social change at the very time a national debate ensued over security policy and the commitment of the US in the Vietnam conflict to defeating a guerrilla movement identified in its eyes with its international adversaries. As the war progressed, US involvement increased as it became increasingly clear that the US was supporting the losing side. Protests against US involvement in Vietnam abroad and internal divisions over the President’s vision of the Great Society at home were key factors in his decision not to run for a second term of office, following his successful election campaign 1964 under his own name.

The election of Richard Nixon became identified with the search for a redefinition of presidential leadership and a readjustment in economic and social policy by changing the relationship between the federal government and the states. The tremendous powers of the Presidency accumulated over the years and Nixon’s abuse of them to cover up his attempt to consolidate his power at the expense of the Democratic Party opposition became encapsulated in the Watergate Affair, the outcome of which was his resignation midstream in his second term of office. But, his impact on reversing the balance of power in the federal system, by returning power to the states under his New Federalism, and on the Presidency, by calling attention to the potential for abuse of power through the informal powers and practices which made the President supreme in American politics, did in hindsight serve as a catalyst for the realignment in American politics experienced during the Reagan years, in Ronald Reagan’s two successive terms (1980-1988). Continuing an aggressive foreign policy of anti-Communism, which culminated in the collapse of the Soviet Union a year after he left office, Reagan’s impact on domestic policy was decisive.

The vision of a Great Society, held by Johnson and his supporters in which activist federal social policy would attack the sources of inequity and injustice in American society, gave way to a more conservative vision of America. The New Federalism of Nixon became the Cooperative Federalism of the Reagan years, as power was devolved to the states and the state governments were given more and more control over the public funds assigned to them by Congress and the Executive through block grants. Coinciding with these changes, the extended period of time in which the Republicans controlled the White House (1980-1992), under Reagan and Bush (senior) made it possible to change the balance of power within the Supreme Court through presidential nomination of more conservative justices, confirmed by the Senate after bitter partisan fights, the outcome of which a five to four split in favor of strict interpretations of the Constitution during the 1990s and spilling over into the new century, which moved the federal government out of its hitherto dominant role in social policy and returned it to strict interpretations of the Constitution that reduced the regulatory powers of the Executive branch of the federal government and granted to the states increased power to determine their own affairs.
      1. Mexico: consolidation of centralization patterns

The reverse occurred in Mexico. As the US entered a major debate over the role of the State in society and the economy from the 1960s onward, the powers of the Mexican president steadily increased, to the point that the Presidency of the Republic became the dominant force in Mexican life. The problems resulting from centralization began to be felt in the political crises of the 1960s, especially in the large cities, which had grown rapidly during the accelerated economic expansion of the previous decades. Urban residents found themselves outside the corporatist structure that had been developed by the post-Revolutionary regime, and it was incapable of incorporating these sectors in spite of attempts made through the populist presidential strategies of the 1970s. As in many other countries, the end of the rapid economic growth in the 1970s and 1980s contributed to a widespread disillusionment with the existing centralized system (Díaz Rivera 1988; Hernández 1993).

Accompanying the pattern of concentrating national fiscal resources increasingly in the hands of the federal government and within it, in the Office of the Presidency, was a managerial style called decentralization, which was in effect an instance of deconcentration (the transfer of authority to act to the governors and those working with them, but with the power to revoke those transfers residing with the President). Various scholars have called attention to this style of administrative federalism as an instance of decentralization to centralize more effectively (Ward and Rodriguez 1999, Rodriguez 1997, and Graham 1990). Only when the hegemony of the PRI was finally broken in the elections of 2000 and the opposition candidate, Vicente Fox, took control of the Presidency did this style of governance come to an end. Even then, the change has not been dramatic. The Presidency of the Republic remains the mainspring of the Mexican system of governance, but under Vicente Fox the New Federalism heralded by Ernesto Zedillo (1994-2000) has finally became a reality in the new valorization given to state and local government. Today, as a consequence, one can now discuss federalism in Mexico as a meaningful construct, precisely because once the system was liberalized under Zedillo and a democratic breakthrough occurred with system-wide ramifications in the 2000 elections, the federal potential always present within the Mexican system has at long last begun to take on significant meaning. Democratization through Mexico has meant recognition of distinct regional and local differences, to which the decentralization of power gave great impetus, through which now for the first time there is a greater potential for meaningful electoral competition at federal, state, and local levels.

In this evolution of Mexican governance, one can identify an evolving set of intergovernmental relations. From 1970 to 1988, these can be summed up as a focus within the State on administrative reform which recognized the need to deconcentrate power in order to respond more effectively to the country’s developmental needs. The PIDER (Integrated Programs for Rural Development), the COPRODE (the state-based Development Committees chaired by the governors), and the CUC (Coordination Agreements) mechanisms characteristic of the José López Portillo sexenio (the six-year term of office held by Mexican presidents, in this case 1976-1982) were instrumental in the development of administrative federal arrangements, in such a way that action could be facilitated at the state levels by gubernatorial initiatives without having to respond to the rigid central controls of earlier years. During the Miguel de la Madrid sexenio (1982-1988) these mechanisms were continued, albeit with a changed terminology to reflect the need of each president to put his particular stamp on his term of office. The short-lived experiment to constitute an independent power for auditing federal and state accounts (SCOGEF), the simplification of work procedures, and bureaucratic initiatives to strengthen these federal administrative arrangements, such as the designation of education and health as priority areas for coordinated action between federal, state, and local authorities), accordingly, were all De la Madrid initiatives. The particular stamp he sought to place on his era in terms of loosening up intergovernmental relations can best be summed up in the phrase “reforma municipal,” the revitalization of municipal government through giving greater attention to service delivery at the local level.

While Carlos Salinas de Gortari (1988-1994) is best remembered in reform terms for economic liberalization and the opening up of the Mexican economy, prior to the corruption scandals that surfaced at the end of his presidency, it is his Solidaridad program, the organization of local development committees to build new ties between local communities and the federal government, through the transfer of federal funds to the local level, which had the greatest impact on this evolution of intergovernmental relations in the direction of a fully developed set of federal administrative arrangements. The upheavals in the economy, accompanying economic liberalization, and the political uncertainty which followed were all instrumental in the rise of opposition politics in the periphery, signaled by opposition victories in a number of states, which were ratified by the federal government. Recognizing that major political changes were in the offing, and that economic reform could not continue without altering the mechanisms of governance, Ernesto Zedillo (1994-2000) committed himself to political liberalization and the opening up of governance, under his Nuevo Federalismo program, a framework for governance that envisioned greater autonomy for the states and federal government recognition of opposition electoral victories at the state and local levels as legitimate and valid in constituting sub-national governments with policies and programs that challenged PRI control of the federal government, albeit with an opposition major in the Chamber of Deputies.

The culmination of all these changes was the election of the opposition leader Vicente Fox (2000-2006) as president of the republic. His sexenio has been marked from the beginning by a determination to make federalism work. Not as visible as the policy changes he and his government have announced, he has affirmed with greater vigor than ever the pluralism represented in making the constitutional concept of free and independent municipalities a reality. Accompanying this affirmation is the attribution to the state governments of real power based on independent electoral bases in the electorate and the transfer to them of new financial resources, as well as acceptance of the checks on presidential power embodied in recognizing the independence of the Congress (a process already begun at the end of the Salinas sexenio) and the courts (an initiative that belongs more to his administration than any other). None of these changes has been accomplished easily, nor has the hold of traditional politicians at the grassroots level been decisively broken in those areas where they are dominant. Similarly, the weakness historically of the courts has not been transformed overnight into a revamped judicial power capable of withstanding external pressures. But greater transparency and openness in governance has been brought to all these areas for the first time as a matter of official policy.

      1. Brazil: disintegration of the Vargas state, democratic interlude, and the recourse to military rule

Cyclical patterns of power related to centralization and decentralization in public policy have long been characteristic of Brazilian governance. In fact, a common theme in the Brazilian literature on political institutions and the building of modern Brazil is the demarcation of these distinct cycles in the struggle between central and local authorities, housed in state and local governments and scattered across the Brazilian subcontinent today in such a way that they have occupied the land mass attributed to Brazil more effectively than ever before.

While the 1940s to the 1980s mark the consolidation of the PRI regime in Mexico, these years are marked by two distinct cycles of centralized, authoritarian rule and decentralized, democratic rule in Brazil. Even though Vargas’ New State (Estado Novo) centralized power in the hands of the federal government, made the Presidency of the Republic supreme, and laid the foundations for Brazil’s economic modernization during the 1930s, the entry of the US into World War II after Pear Harbor (December 7, 1941) changed all this decisively. Vargas aligned Brazil with the Allied wartime effort, made Natal (the easternmost point in the Americas) available as a critical supply and communications point in the Allied campaign, and once the invasion of Sicily began in July 1943 dispatched Brazilian troops to fight with US and British forces in the liberation of Italy. Once the war had been won and Brazilian troops returned home, the pressure to democratize was unavoidable. To prepare for a democratic transition, Vargas created two new parties (the conservative PSD and the populist PTB)(in 1945) to secure his influence over national politics and to continue the state-laid economic modernization program he had begun. But the democratic opposition, the Union of Democratic Forces (UDN) outmaneuvered him. The returning military officers joined hands with the civilian opposition and displaced Vargas from power.

Presidential and Congressional elections in December 1945 gave a decisive mandate to democratic forces, to form a new government. Under the new president, elected for the term 1946-1951, the new Congress wrote a new charter, the Constitution of 1946. But, as was to be the case a little more than twenty years, in a second democratic document, the Constitution of 1988, and after a second and more repressive authoritarian regime in which the military had the upper hand, conservative forces exercise sufficient voice to be able to limit the extent of democratization. By under-representing large urban areas in determining the number of votes necessary to elect representatives to the Chamber of Deputies and following the US model in guaranteeing to each state the same number of representatives in the Senate, conservative political forces were assured sufficient representation at the federal level to defend their interests. For the first time a national party system emerged which, while multiparty with three parties dominant─the pro-Vargas PSD-PTB alliance versus the anti-Vargas UDN─was more akin to US experience in party formation than that of the rest of Latin America or Western Europe. The basis of the party system was local and regional alliances, centered in the individual states. Throughout this era of open government only three parties were sufficiently well enough organized to function nationally, the PSD, the PTB, and the UDN, but even these organizations were not cohesive party organizations, but clientelistic networks which functioned at the national level as coalitions of state party organizations.

With pro-Vargas alliance dominant in Congress, the PSD-PTB established a pattern of controlling the public agenda that was to remain intact throughout these years. Only in 1961 was it broken, with the election of Jânio Quadros as an outsider. Consequently, with Vargas now rehabilitated as a “democratic” leader standing for election, this alliance was able to return Vargas to power in 1951. Accustomed, however, to the populist-authoritarian style of governance that had characterized the last phase of the New State, when he used his position as President of the Republic to secure mass support, Vargas was not successful in his new presidential role. Rather than resign, at a defining moment of crisis in 1954, he committed suicide. His vice president finished out his term of office and in the next schedule election, 1956, the PSD politician Juscelino Kubitschek, from Minas Gerais won a decisive victory, with the combined support of the PSD and the PTB. This was to be the high water mark for the 1946 Republic. Kubitschek understood instinctively how to make this system of populist democratic politics work and that to rule effectively not only did he need to maintain a working majority in Congress but also to keep popular public opinion behind him. For, in this new political world of a newly mobilized citizenry in a series of party organizations in which votes were largely cast in terms of the advantages to be gained from political patronage, he needed both to exercise effective national leadership as President and to secure a public agenda that would secure economic growth and respond to the new image of a vibrant nationalism identified with a country on the move. The great symbol of his presidency and the note on which his term of office came to an end was Brasília as the new national capital created out of unsettled land in the interior of the country.

While Jânio Quadros was able to mobilize populist sentiment behind him, with the new image of governmental reform and decisive movement away from the old-style patronage identified with the PSD and the PTB, on taking power, he was so convinced of his mandate that he conceived of governing the country above and beyond partisan party identities. By August 1961, the country was in crisis and, when he resigned expecting to receive a huge upsurge in popular support which would give him powers without accountability to the Congress, the populist majority shifted to his Vice President João Goulart of the PTB. Brazilian electoral law for the 1946 had been written in such a way that the President and the Vice President were elected on separate tickets, so that while Jânio won the presidential race the PSD-PTB alliance was sufficiently strong enough to secure control of the vice presidency.

Under the informal political understanding that stood behind the democratic rule of determining electoral outcomes by winning majorities at the ballot box, conservative politicians had worked to secure a regime in which political conservatives and moderates would retain the upper hand. This was encapsulated in the PSD-PTB alliance. While political participation could be expanded and new working-class voters could gain political representation with their own left of center parties, the principal one of which was the Vargas-created PTB, the PSD and the UDN were seen as checks on left-centered populist. Vargas himself intended the PSD-PTB alliance to function as a mechanism for delivering majorities but under more moderate or conservative leadership. In the 1960 election, Goulart was placed in the vice presidential slot to give voice to the newly enfranchised, but not to govern as president. Quadros’ resignation threw the political settlement behind the 1946 constitutional arrangements into crisis. When the attempt to change the rules of the game governing presidential power, by legislating into existence a semi-parliamentary system parties which required a popular referendum failed, politics and inflation spiraled upward. When the regime collapsed in March 1964, it was a reluctant military that had intervened at the request of conservatives and moderates frightened by the prospects of Goulart consolidated in power with a left-oriented populist base.

For want of a better alternative, the new governing military and civilian alliance of those opposed to Goulart and PTB control of the presidency backed into authoritarian controls. The initial idea was to purge the system of its left-oriented populists, and once this had been accomplished to return power to the civilians under the 1946 Constitution. Throughout the remainder of 1965 and into early 1966, political purges proceeded ahead. When it became apparent that the existing clientelistic system, with its bases secured by the PTB and the PSD, could not be dismantled without also moving against the PSD, the reformist military led by Castelo Branco turned to its UDN supporters with the hopes that they would provide a more reliable set of civilian governmental officials. But, their leader, the outspoken governor Rio de Janeiro state, Carlos Lacerda, was unwilling to accept the new constraints. Reluctantly, but convinced that authoritarian controls was the only way to effectively purge old-style populism and clientelistic politics, the Military issued the first of its authoritarian decrees, in the form of supplemental acts, atos adicionais, which abolished all the existing political parties.

Without ever declaring a new authoritarian regime officially, the military so rewrote the 1946 Constitution with these supplemental decrees that by 1967 they had in effect created a new constitution, which put the military in control of the Presidency of the Republic and gave the military the upper hand in building a new ruling coalition by identifying those in civil society, essentially of middle and upper class background, who supported the new order, as a political and economic necessity. The political “necessity” was to purge the country of corrupt, patronage-based politics and the economic “necessity” was to end the acute inflationary spiral Brazil had become locked into through sustained political crisis and to use state-controlled economic growth and development to secure Brazilian markets.

A succession of military presidents followed, but the principle was always respected: this was not to be a military regime but a conservative alliance of military and civilians, inside and outside government, who would secure the economic system and the privilege that those who had a stake in the new system were entitled to. The new economic model of state-led economic growth through massive investments in infrastructure and new Brazilian enterprises protected through market reservation which secured their advantage over foreign enterprise worked well initially. These were the years of the “Brazilian miracle” which last from 1969 into the early 1970s, until a series of oil shocks in the international economy undercut and destroyed the strategic of securing foreign credits and investments to build a solid industrial base in Brazil and develop a national market commensurate with Brazil’s huge size. As an oil-based economy, without oil of its own to meet its needs, Brazil was highly vulnerable to oscillations in the world economy, first through the availability of new oil-based wealth for investment, then its rapid decline, followed by dependency on evermore expensive foreign energy supplied and the return of acute inflation.

The end of the economic miracle coincided with increased control by the military and the police over dissidents. In turn, the expansion of these controls through repressing dissent on an ever-expanding base and with increasing intensity, generated demonstrations and strikes, strikes that protested the economic austerity imposed at the expense of salaried employees as well as the military and police brutality that was used to break up these demonstrations. From 1974 until 1985, a protracted transition began, one of the longest on record, in which the government and its supporters looked for a suitable means of exiting from power, without losing their ability to exercise influence over who would govern in the aftermath, while the opposition mobilized groups outside government to an extent never before seen in Brazil, until finally an exit strategy was agreed upon in permitting a conservative leader of the opposition from Minas Gerais, Tancredo Neves to be selected as president by a congress elected under rules set by the regime.

Uncertainty continued long afterward, for on the eve of assuming power in March 1986 Tancredo Neves died. Under the newly agreed upon rules, vice president José Sarney, the conservative politician identified with the groups that had supported the authoritarian regime and had only exited when it appeared that military-based government was collapsing, became president of Brazil. Democratic rule thus returned to Brazil in the midst of troubling conditions: sustained economic crisis and conservative control of the presidency by those who had collaborated with the departing regime.
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