The Economic Debacle In Latin America

Latin America

With the region showing almost no percentage growth, last year’s economic numbers for Latin America didn’t paint a rosy picture. The United Nations Commission for Latin America estimates that in 2019 the Latin American economy grew only at a 0.1% rate and is expected to grow only 1.4% in 2020.

Let me offer a refresher on the importance of the region. We may start with trade. Latin Americans buy four times more goods from the United States than the Chinese do. U.S. trade with Mexico alone is larger than its trade with China. U.S. trade with Latin America decreased 10% last year, but its trade with China went down more than 25%. Like other economists who favor the free economy, I see imports and exports at free market prices as good for both sides. The reduction in trade is a loss for all. The end result will depend on the level of tariffs and openness to markets.

In nominal terms, the Latin American economy is larger than Germany’s but smaller than Japan’s. But in Purchasing Power Parity (PPP), which considers the amount of goods that the population can buy at local prices, it is as large as the economies of Japan and Germany combined. Roughly half the size of the U.S. economy. This is due in great part to the large proportion of the economy that is informal.

Without question, Latin America’s biggest economic problem is the weak rule of law, the institutional framework needed for a free economy to prosper. If we consider 6 out of 10 a passing grade, only three countries – Chile, Uruguay and Costa Rica, representing just 5% of the region’s GDP – have judicial institutions that do not flunk the test.

I’ll give some of last year’s bad news first. One negative was the lack of progress in the effort to liberate Venezuela. Another negative, and for me an even greater one, is the social explosion in Chile. Allegedly ignited by protests over public transportation fare increases, activist street revolts ended up burning or destroying 80 metro stations and numerous other targets, including supermarkets. The short-term economic damage is calculated to be around $2 billion (in an economy that is less than 2% of that of the United States), but the medium- and long-term damage is incalculable.

Chile’s problems have to do with factors such as unmet expectations, class conflicts and well-planned activism more than with economic fundamentals. The manner in which the Chilean government and business elites reacted to the upheaval (condemning the violence but agreeing to most of the protesters’ demands) will convince many that the free-market experiment in Chile failed for being too extreme. It also convinced others that if you lose an election you can reverse the results through street revolts.

In addition to economic damage, the revolts in Chile will weaken the efforts of those who want to mimic their successful economic policies and move towards more free markets in Latin America. Crises can have a long-term impact on ideas. The Great Depression and, to a lesser degree, the recession of 2008 – both of which were caused by economic factors – are prime examples. The first led to a huge change in the economic narrative about the benefits of the free economy, convincing many that an economy left to itself was prone to major cyclical crises. The crisis of 2008 and its aftermath reinforced the idea that having central banks pump liquidity into the economy is the only way out. What happened in Chile will fuel the notion that only third-way economic policies, such as the social democracy that exists in much of Europe, are viable in Latin America. My lament is the socialists’ joy.

The opposite might happen if the new Brazil continues to liberalize its economy and its government is successful in retaining power. I have visited the country several times and have studied and written about its economic reforms, and it is the only large country that I approach with some optimism. I regard what happened in Brazil as almost a miracle – not an economic but a social and political miracle. So-called economic miracles are the natural outcome of respecting the human right to own private property and to trade and improve on that property. The miracle is how to reach a workable and sustainable consensus among major civil society players to establish the conditions that have, for example, turned Nazi Germany into today’s Germany, or poverty-stricken South Korea into the prosperous Korea of the 21st century. Similar economic policies can turn what was a dysfunctional populist Brazil into the free, orderly and prosperous country that is hoped for by many. The regional impact can be significant, as Brazil represents half of South America in both economy and population. The GDP of one city alone, São Paulo, is larger than that of Chile. A Brazil growing at a 4% rate – not impossible to achieve by 2022 – would change my pessimistic forecast for the region.

Mexico is the second largest Latin American economy and the most relevant for the United States. There, in addition to the problematic government and its leftist ideology, we see two other major forces: drug cartels and crony capitalists. Both damage the prospects for prosperity. We recently saw how the cartels defeated the army in the state of Sinaloa when the latter detained, and then released, the son of drug lord Joaquín “Chapo” Guzmán, now in federal prison in the United States. Founded in the late 1980s, the Sinaloa cartel is one of the most powerful drug trafficking organizations in the world.

Crony capitalism is nothing new in Mexico. What is surprising is how accepted it is across the ideological spectrum, even among those who say they champion the free economy. At the turn of the century, Alfonso “Poncho” Romo was seen as one of the businessmen contributing to a new, more entrepreneurial Mexico. He founded a business school, Duxx Graduate School of Business in Monterrey, which attracted outstanding economists, including from the United States, who understood and valued the principles that lead to a free economy. Top students competed to earn a place at Duxx.

After a major business decision that turned out poorly – namely, the purchase of Seminis (then a leading seed and bio-tech company) – and other actions that affected most shareholders, Romo’s business clout declined and he closed Duxx. Romo also began to change the direction of his political involvement. The long process led him to become a key ally of President Andrés Manuel López Obrador (often known as AMLO). Several other businessmen jumped on the president’s bandwagon as well. Another who has profited from his closeness to López Obrador is Ricardo Salinas Pliego, the third-richest Mexican businessman. Last year when his bank, Banco Azteca, received a lucrative no-bid contract to handle a major portion of welfare payments, many cried foul. But as Salinas Pliego had become a major proponent and supporter of classical liberal and libertarian causes, many if not most have remained silent.

The no-bid contract and other business dealings have attracted major news coverage in Mexico as well as in respected U.S. publications, such as the Wall Street Journal and Bloomberg.

Farther south, Argentina is still the region’s third largest economy, though compared to its neighbors it has seen almost continuous decline. Unfortunately, the new government has promised higher taxes, more spending and more controls. In all likelihood the IMF and other creditors will let them push the ball forward and postpone the request for payments. The new interventionist government’s first crisis will likely be caused by dissatisfaction among provincial governments and local constituents who will see that campaign promises are not fulfilled. Several companies have announced that they are leaving or canceling projects in Argentina. If Argentina does not reverse course, its future could mirror that of Venezuela.  

In Colombia, since President Uribe started to recover the country from the grip of the narco-guerrillas, freeing the economy has never been the main goal. Governability is more essential. In the short period since they won the presidential election, President Duque and his vice president Martha Lucía Ramirez have been losing popularity. The recent municipal elections saw the left win all major contests. It is very difficult to emerge from extended guerrilla and narco-guerrilla wars. President Santos, who governed between Uribe and Duque, led the effort that culminated with the peace pact with the Marxist-Leninist FARC guerilla group. It earned him a Nobel Peace Prize but it helped shift the focus away from economics. I do not see any major positive trend that will put the Colombian economy on a path to faster growth.

Despite considerable danger ahead, Peru will continue to perform better than most of its neighbors. Among the largest economies in the Americas, it has the best long-term economic record after Chile. Its political record, however, is not good: most of its ex-presidents have been indicted, one committed suicide, and the current one, Martín Vizcarra, recently dissolved Congress. The elections are scheduled to take place later this month after a period of extreme politicization of the judicial system. Vizcarra has been diligently applying the principle “to my friends everything, to my enemies the law.”  

It will soon be forty years since Hernando De Soto’s study of the informal economy. Even today, however, at least 70% of Peruvians work in the extra-legal sector. Many participants in the informal economy see the state as a failure – and not only the state but also private sector actors who collaborate with the state. These two “evils,” the state and the private sector, are both stakeholders in mining, a sector in which Peru is a world leader. Some analysts argue that after the election, this entire sector might be up for grabs. Those who fight for the destruction of the current status quo do not realize that reverting to past statist policies in mining and in other key areas of the economy would put the same discredited politicians back in charge of the economy. What could go wrong?

When I moved to the Washington area in the late 1980s, experts on Latin America such as Mark Falcoff, then at AEI, were forecasting that Peru would disintegrate as a nation. I do not think that will happen, but everything tells me that Peru is entering a period of increased instability.

The courageous Bolivian civil society was able to defeat former president Evo Morales’s attempt to take power indefinitely. The country will have national elections this coming May. The current interim president seems to be the best hope to lead the coalition of non-socialist parties. The Cuban-Venezuelan axis, with its allies and enablers in Iran, China and Russia, have the Andean countries in their sights and will be very active in trying to influence the results.

The year of Venezuelan liberation?  

It is known that Rudy Giuliani met some of the businessmen who made fortunes from crony deals with the Chávez and Maduro dictatorships. Several of them are under investigation.A recent article in The Washington Post reported that Giuliani even stayed at the luxurious house in Madrid where one of the business leaders, Alejandro Betancourt López, now lives. And it seems that Giuliani was not the only non-Chavista visitor. Could it be that some Venezuelans would be willing to help buy liberation in exchange for a degree of immunity?

In recent years when I have asked my best Venezuelan friends (some of them leading businessmen who had to emigrate) if they could donate substantial amounts of money for efforts to liberate their country, several told me: “Alex, the money now is not with us, it is with those who made money with the regime.” They were making reference to the businessmen mentioned in in the Washington Post article as being clients or having met with Rudy Giuliani. Other people close to the current Venezuelan interim president Juán Guaidó, and others close to the U.S. administration, might already be negotiating with these “Bolichicos” (name given to the younger generation of the Boligarchs, or those who made money with the Bolivarian government of Venezuela). As long as those who are currently in power are not deposed, it is premature to forecast when and how the Venezuelan economy will grow again.

The countries mentioned in this overview represent more than 85% of the Latin American economy, and are thus sufficient to elaborate a regional forecast. Among the smaller economies, both Paraguay and Uruguay can act as safety valves for the troubles that many Argentine producers will suffer in the near future.   Central American countries have small economies. In terms of remittances and trade they are more integrated with the United States than the rest of region and benefit from U.S. growth. Unfortunately, except for Costa Rica, they have very weak rule of law. Nicaragua, with very bad economic policies and a government favorable to Venezuela and Cuba, has more potential to damage its own people than its neighbors.

As mentioned above, the revolts in Chile and their aftermath so far seem an unmitigated disaster for those who favor the free economy. The country will likely endure a couple of years of very low growth and then, under a model of “Scandinavia without Scandinavians” policies, suffer an unknown future. I only assign a 20% chance that Chile, after two years of quasi-stagnation, will not shift to a utopian leftist program, begin a period of deterioration of rule of law, and become more “Latin American.” On the other hand, I give more than a 50/50 chance that Brazil will continue on the path set by Minister Paulo Guedes’s economic team.

What are the factors that led to this debacle? Answering this question deserves another article. It is always easier to point fingers at others. But looking at my world of think-tanks and advocates of the free economy, I believe that the neglect of topics such as internal security, culture, strategy, foreign influences, corruption and cronyism helped pave the way for today’s economic, social and political frustrations. 

   

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