ABSTRACT. Why do governments change economic policies? In advanced, industrial democracies domestic political actors and economic circumstances largely explain policy changes. The economic policy-making process is less clear in developing democracies, particularly in adoption of market-oriented reforms in Latin America’s young democracies. I argue that most studies of the region overlooked the fact that market reforms involved two separate sets of policies with divergent transaction costs. Consequently, I examine the differential effects of international pressure and economic crisis versus domestic political actors across areas of reform. Surprisingly, I find that a previously overlooked form of international pressure commonly found in the diffusion literature had a strong effect on both forms of market liberalization, and that the preferences and organization of the legislature and civil-society actors exerted stronger effects on policy-making than the extant literature suggested. I also find that specific economic conditions have only weak effects on the adoption of market-oriented reforms and that presidents often behaved in unexpected ways, mirroring a common concern found in the literature on presidentialism in Latin America. pp. 11–35
JEL Classification: D72, F59, P11

Keywords: political economy, market-oriented reform, Latin America, diffusion, 
executive decree authority, and corporatism

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