Finance Minister Levy is leaving his post by year
end. If so, he will have lasted just one
year.
Almost a year ago, soon after his nomination, I wrote[1] that while he was highly qualified for the job and would “find some initial freedom of action… [which] could last a couple of years..,[his] remedies and policies.. are the exact opposite of what the PT wants and what President Rousseff has supported in the past. I also wrote that Brazil needed to make profound reforms which “are political in nature and go far beyond the competency of the Minister of Finance”.
My misgivings were proven valid even sooner than I
expected. Minister Levy didn’t receive
the political backing from his president nor from the PT in congress. As a result, he could only raise some taxes
but couldn’t significantly cut public spending.
The last straw was the government refusal to hold the line at 0.7% for
the 2016 primary budget surplus.
Nelson Barbosa, currently Planning Minister and a
traditional proponent of active government intervention in the economy, will
replace him. He will get along better
with President Rousseff but I don’t think that it will mean better
decision-making.
Ravaged by corruption scandals, economic recession and depressed commodity prices, the future looks bleak for Brazil. The political opposition is by and large clean (perhaps because it didn’t have access to the levers of power) but weak and lacking grassroots organization.
Further south, the winds are beginning to blow in another direction. Mauricio Macri was elected president of Argentina and wasted no time in liberalizing the foreign exchange regime via a dirty float system. He also cut taxes on the main grain exports which got him the exporters’ agreement to bring back, daily, some $400 million of grain export proceeds. Finally, Finance Ministry’s and the Central Bank’s teams look very good.
I have no doubt that the Argentine recovery will be rocky at times: undoing several years of ill-advised policies takes time and is politically difficult; the opposition is well organized and deeply resentful of its loss; finally, the world economies are still weak.
But Macri has a number of factors in his favor,
besides having adopted good policies and chosen good people: Argentina is smaller than Brazil, with a
population of 44 million vs. 206 million; its population is better educated and
economically less unequal; last but not least, he was clear in his campaign as
to what his policies would be and voters, in their majority, backed him.
In Venezuela, the heirs to Hugo Chavez have suffered a heavy defeat in the latest congressional elections. Clearly, the population is unhappy with the abysmal performance of the economy. External pressure is also mounting for the regime to respect human rights. More than anywhere else in the region, low commodity prices are shaking political and economic foundations.
Elsewhere in South America, commodity prices are forcing government to revise their policies, although with distinct flavors.
The education, social and political reforms which
the Bachelet government wanted to carry out have faced fiscal realities: the
money is not there; the haste with which they were introduced met a pushback
from both moderate politicians and a population facing other priorities.
In Colombia, where oil accounts for half of exports, the government is scrambling to raise tax revenues, ease oil and gas permitting, hold inflation in check with a more aggressive monetary policy and, at last, intervention in the foreign exchange market. The wild card is the peace process with the FARC: the rebels are increasingly isolated as their foreign backers are short of funds (Venezuela) or considering a change in strategy (Cuba).
In conclusion, the implosion of the hard commodity markets has wrecked havoc in South America. Populist policies have run out of money and change is forced upon these countries. The choice is between liberalization, repression and chaos.
Argentina has chosen liberalization, Venezuela has chosen repression, Brazil is heading towards chaos. Chile and Colombia are so far sticking to a middle of the road regime of open economies and politics. If the prices for oil, copper and iron ore weaken further in 2016, the pressure will rise further on governments to “do something”. The more unpopular they are, the harder it will be for them to heed to moderation and rationality.
Optimists will say that a cycle of populism in ending in South America, and that the example of Argentina will favorably influence its large neighbor to the north, Brazil; that Chileans and Colombians are unlikely to turn their backs on two decades of social and economic progress; that Chavismo has lost the legitimacy, credibility and financial means to rule as it wishes.
Pessimists will argue that economic and political liberalism is a foreign concept in South America and that voters not so much want that as an interventionist government largely financed by buoyant commodity prices.
Let me be a guarded optimist. I do believe that most people aspire to a better life for their families and themselves, greater freedom and pride in their country. In Latin America, they will also have realized that much of the government bonanza of past years was due to external factors (China’s appetite), not bureaucratic excellence; they have also seen the true cost of government largesse. For all the above, I think that a new cycle is starting, first in Argentina.
2016 promises to be interesting.
