This is a guest post by Tasha Fairfield, Assistant Professor in the Department of International Development at the London School of Economics and Political Science, as part of the Duck of Minerva’s Symposium on Structural Power and the Study of Business. This post draws on ideas developed at greater length in Fairfield’s article found here. Links to other posts in the symposium can be found here.
Taxation is a policy area rife with examples from around the world of the substantial influence that business can wield. Consider Latin America, a region known for phenomenal inequality and light taxation of income and wealth (much like the United States in recent years). Business has been particularly successful at securing favorable tax legislation in Chile––business owners who comprise the top 1% receive upwards of 22% of national income but paid average effective tax rates of roughly 15% (compare to 24% in the US in 2004).
Shortly after taking office in 2014, President Bachelet introduced a sweeping tax reform to rectify this situation. The goals were to raise revenue from the wealthiest to finance education reform and reduce inequality. However, the government acquiesced on core aspects of the bill that business opposed. A leader of the student movement, which had placed the issues of education reform and inequality on the national agenda through a wave of mass protests (2011–2012), offered these reflections on the negotiated compromise:
The power that business has is tremendous. …entrepreneurs said that there would be no investment, that there would be a slowdown and unemployment would increase. …but …if there is more unemployment or a slowdown it is because they themselves stop investing. So they have a kind of negotiating position that is disgraceful for a democracy.
These remarks give a cogent lay interpretation of business’s “privileged position” in capitalist democracies.
But business does not always get its way, even on core issues like taxation. In Private Wealth and Public Revenue in Latin America, I find significant variation in the extent to which business actors have managed to keep tax increases off of the agenda and/or block such initiatives when proposed by revenue-strapped and/or equity-conscious governments. The key to explaining this variation is to assess business’s structural power in conjunction with its counterpart, instrumental power. Concisely put, instrumental power describes business’s capacity for political engagement, while structural power stems from market-coordinated investment decisions. If policymakers think a reform will hurt investment, they may rule it out for fear of harming growth and employment. These concepts of business power—instrumental and structural—are important yet often overlooked variables in comparative politics. But before they can be put to use, they need to be carefully defined and operationalized. This task has been particularly challenging for the concept of structural power.
My contention is that putting structural power to work requires wedding the concept’s “structural” underpinnings with the importance of policymakers’ perceptions and the role of anticipated reactions, which are central to classic articulations of the concept. Structural characteristics of the economy and investment, like the relative weight of the private sector vs. the state, or the level of capital mobility, clearly matter when it comes to how much private investment decisions affect growth and employment, or the exit options available to capital in the face of policy changes that are not viewed as business-friendly. But policymakers’ expectations about how investors will respond are also critical. Policymakers have to believe that the reform in question will actually create negative investment incentives that will hurt the economy. If that is not the case, structural power is either weak, or it is simply not relevant for the policy process. In other words, policymakers’ perceptions matter for how and when structural power acts—even expert economists may disagree on how a reform will affect growth and investment, given the complexities of real-world economies.
Theorizing the relationship between structural power and instrumental power is also critical (see here). These are distinct concepts that correspond to different means of influence: instrumental power is political, structural power is about market reactions. But they can be mutually reinforcing. For example, instrumental power can augment structural power. Lobbying and media campaigns can exacerbate concern over investment, or even create concern among policymakers who initially did not anticipate that a reform would produce any negative economic consequences. Of course, business regularly argues that reforms like tax hikes will hurt investment. But policymakers do not always believe it. The key point is that concrete sources of instrumental power–-like media access, technical expertise, or close relationships with policymakers––make it more likely that policymakers will take those arguments about investment seriously, rather than writing them off as self-serving or lacking credibility.
Finally, any endeavor to understand the scope of business influence should consider the role that electoral incentives and other societal actors can play in policy processes. Electoral incentives can occasionally counteract business power—policymakers may be more attuned to what the public wants rather than what business wants on high salience issues, as Culpepper and others have stressed. More significantly, if popular sectors mobilize, they can counterbalance or even overwhelm business power. In Chile, student mobilization, which drew participation from broader sectors of society, broke business’s implicit veto over tax policy and paved the way for the 2014 tax reform. Yet the absence of social mobilization in favor of the reform during the policy process opened space for business to win important concessions—thanks in large part to structural power.