Over the past decade, much of South America has experienced a revival of socialism
and populism. Not surprisingly, this was accompanied by a longing for an idealized past and
charismatic historical leaders. The names
and deeds of Perón, Bolivar and Castro were once again invoked by their heirs
and called upon to repel foreign ideas and purported hegemonic designs.
In Brazil, after eight years of economic reforms and
liberalization under President F. H. Cardoso, leaders from the PT (Ignacio Lula
da Silva, Dilma Rousseff) were voted into power. They gradually reversed course and increased government
control over and intervention in the economy.
Petrobras, Vale do Rio Doce and the electric utility sector have been
their main targets to-date. The most
apparent victims have been minority shareholders, but the companies themselves
have paid a price. Petrobras has kept
missing its production targets while its debts have skyrocketed, tripling in
four years when operating cashflows rose by just 10%[1]. By departing from precedent (if not the letter of
the law), the government has made more difficult and expensive to upgrade and
expand the electric utility sector. The
purpose of this interventionism was to lower energy costs thereby giving a boost to domestic industries and keeping inflation in check. The same rationale has underpinned the active
management of the currency. But the unexpected
consequences have exceeded the sought after benefits.
As an apparent quid pro quo to their PT base for putting
some limits on their economic activism, these two presidents have carried out foreign
policies which have been mildly confrontational with the US and openly
supportive of authoritarian regimes like Argentina, Venezuela and for a while
Iran. They wanted to reinforce Brazil’s
influence over the rest of South America, and to that end, they
tacitly endorsed policies and behaviors which would have caused strong
protests had the US, not Brazil, been behind them.
In Argentina, President Nestor Kirchner, and upon his death
his wife, Cristina Kirchner, have carried out populist economic policies (which
have been extensively commented in this blog) while enjoying close kinship with
the regime of President Chavez. Their
policies have failed, and the government has had to win over voters with subsidies and transfers of wealth from those who had some (foreign
creditors, large companies, retirees) with little regard
for effectiveness. To a much greater
extent than in Brazil, the rule of law has been consistently disregarded by
the authorities. The result has been a
dearth of investment and a comparative drop in standard sof living, which in
turn triggered more damage for the economy and society.
In Venezuela, President Chavez has seen himself as
the heir to Fidel Castro and Simon Bolivar, borrowing his economic and
political playbook from the former and promoting his regional aspirations after the
latter. Eager not to repeat Castro’s
early mistakes, at first President Chavez was careful to operate within the limits
of the laws, although such restraint did not endure. Venezuela also benefitted from its large oil
revenues which allowed the government to pay for unorthodox policies and to
launch a dizzying series of social programs, again with much waste and little
in the way of benefits. The transition
to socialism followed the ‘frog in boiling water” strategy. Until recent years, President Chavez benefitted from a political
opposition which had been widely criticized while in power and which had
difficulties in rallying behind a coherent governing program.
Lower level regional players gravitating in the same
orbit include Presidents Morales in Boliva, Correa in Ecuador and Ortega in
Nicaragua. While each of these countries
is driven by somewhat different dynamics, their current leaders have benefitted
from their predecessors inability to overcome widespread poverty.
For most of the decade, the shortcomings of these
countries (the “Atlantic Group”) were masked by booming commodity prices plus, in
the case of Brazil, the dividends of the Cardoso years. And if their decline has taken years, it is
because it has taken time for the larger countries to run down their wealth.
In contrast, the “Pacific Rim” countries - Chile,
Colombia, Peru and Mexico - running more open and liberal political systems, adopted
a development model where foreign direct investment was encouraged and where
domestic demand provided some balance to exports. Perhaps the most striking example has been
Peru, whose president once ran on a quasi-socialist platform and enjoyed the
open support of President Chavez. Once
in power however, he has adopted a balanced approach, negotiating an increase
in the state share of mining sector profits, reforming and expanding the
private pension system and generally trying to raise standards of living. In so doing, he
surprised many, including me. Once the Latin
economies are measured in real terms, it is clear that the Pacific Rim
countries enjoyed a much better decade than their Atlantic counterparts.
What next?
The current health problems of President Chavez mark
the end of an era. Certainly, he has
been the most media-savvy regional leader, and thanks to ample oil revenues,
its most influential. Should he leave
the scene, it is not assured that Chavismo will collapse quickly: half of the
population idolizes him, his entourage exercises very close control over both the
population and the military. The most
immediate danger to Chavismo is probably internal division. Regionally, it is likely that Venezuela’s
influence and ideology will recede; as commentator Moises Naim observed, there
is no one in Venezuela with Chavez’ charisma or absolute control over the
petrodollars spigot. This will mostly
affect Ecuador’s Correa and Nicaragua’s Ortega.
As to Bolivia, it will likely have to rebuild its bridges with Brazil.
Argentina’s economy, even measured in overvalued
pesos, barely grew in 2012. The
government has little money left to distribute, foreign creditors are more wary
than ever (thanks to the activism of some and to rising provincial debt defaults),
some of its historic political allies are rebelling, the population is upset by
strict exchange controls and poor economic results. The oil sector is at a strategic standstill,
with YPF taking control of the upstream and of some related businesses (such as utilities),
and investors such as Bridas, Chevron and others, driving a very hard bargain
to provide capex financing. Energy
imports are soaring, which means that energy subsidies are getting even more
expensive. It seems to me that the
government will have to adopt more orthodox economic policies (settling with
Repsol, raising energy prices, improving the terms of crop exports, devaluing
the peso) to prevent a deep recession and social turmoil. That in turn will inevitably impact the
political sphere.
Brazil is discovering the limits and high costs of
government intervention. Its state champions
have become uninvestable; incessant currency manipulation is affecting funding
costs; credit policy has been incoherent with the official development bank,
BNDES, offering long-term development loans at rates comparable with overnight
rates (in effect, the resulting policy is akin to driving with a foot on the accelerator and the other on
the brake). Finally, companies find it
very costly to run through the maze of bureaucracy and state and federal tax
regulations. More worrisome, Brazil is
leading a Mercosur that is attracting inward-looking economies which, not by
chance, also are the worst performing.
Just like no team will ever win the World Cup by focusing mostly on defense, the
Mercosur is destined to failure unless it aspires to international
competitivity based on its comparative advantages.
This is in clear contrast with the Pacific Rim of
the region.
It is quite remarkable how far Mexico has come. Back in the 1980s, in the depth of the Latin debt
crisis, Mexico launched its maquiladora experiment.
In those days, it was little more than assembly plants located just
across the US border. Since then, Mexico
has joined NAFTA which had two very large benefits: ensuring the continuation
of democracy and opening up the US market.
The results have been quite extraordinary, despite pervasive security
problems due to internal drug wars.
Once Colombia regained control over most of its
territory from the FARC, ELN and drug gangs, and was able to ensure security,
the economy took off. Thanks to its
large population, it was not overly dependent on commodities, even though it
benefitted from high global demand for oil, coal, nickel and other raw
materials. Reasonable investment
policies caused a boom in both the mining and the oil and gas sectors. Poverty levels were lowered by more than half
in a decade. Finally, competent fiscal
and monetary policies have pushed inflation down to levels which would have been
unthinkable not so long ago. Long
repressed, and fuelled by rising standards of living, construction has been on
a long term growth path.
In our modern era of instant communications and
diminished official control over information, the good and the bad news travel easily and fast. So do people.
Indeed, part of the reason why Venezuela will not be able to sustain its
regional influence is that its most capable people have been leaving.
It is becoming increasingly evident to people in Argentina
that the country is on the wrong track.
Venezuela is deeply divided, and social (and therefore political) pressure
will continue to mount. Brazil is a more
complicated case because of its sheer size and greater degree of economic and
political freedom; but its GDP growth is lackluster, the PT has suffered from a
succession of embarrassing scandals and foreign investment is slowing down. It seems to me that President Rousseff will
need to change tack if she wants to be successful.
This is not to say that the Pacific Rim is home free. President Humala in Peru must deliver on his
promises of a Third Way. Colombia can’t rely
on oil, coal, metals and construction forever; it must accelerate its
investments in industry, agribusiness and infrastructure. Chile must preserve its free-market policies as
their enter their fourth decade. Most of
all, the world economy needs to recover because emerging markets can’t rely on
domestic demand alone to growth fast.
But for the last ten years, the liberal economies of
Latin America have done much better than the rest, and in the age of the
Internet, budget airlines and TV, this is not lost on the people. As historic leaders such as Castro, Lula and
Chavez leave center stage, realities come into sharper focus while tales lose
their aura. Overall, this is good for the region, and it gives reason for optimism.
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