What mattered this year in Latin America

Mural

 (Photo credit: ®Dave)

As it’s New Year’s Eve, I thought I would take a stab at a best-of list for a post, if only because this gives me a chance to write about several different topics at once. So, without further ado, and in no particular order, here are five of the most important things that happened in Latin America this year.

1. Hugo Chávez dies

This is probably the most obvious choice because of the preeminent role that Chávez played over the previous 14 years in Latin American politics. Chávez’s death in March to a still-undisclosed cancer created a vacuum both in Venezuela’s domestic politics and on the Left in Latin America. Nicolás Maduro has attempted, and to some degree succeeded, in filling both gaps. Internationally, he has probably been less successful; he is not the leading voice among leftist politicians in the region, but at the same time, neither has anyone else seized the mantle. Domestically, Maduro has been surprisingly adept at solidifying himself in power.  Chavismo has lined up behind him and Diosdado Cabello—the man perceived to be his biggest rival for power—has, at least for now, dutifully played the role of attack dog rather than potential challenger.

Economically, the inevitable fruits of populism have begun to blossom in earnest this year, and Maduro has proven thoroughly incapable of dealing with Chávez’s biggest legacy. The Central Bank only finally published its November inflation figures yesterday. And they were ugly: 4.8 percent for the month, which works out to an annual inflation over 50 percent. Moreover, the scarcity index remained well over 20 percent, meaning that there were shortages of more than 1 in 5 products. There is little reason to believe either number will fall in the months to come—well, they might, but that’s just because the BCV is considering changing its methodology à la argentine—as the deficit continues to be covered by printing money and the government implements more price controls.

Economic distress in Venezuela is important for two reasons. One is that Venezuela has the fourth largest economy in Latin America and economic contraction, and especially crisis, would affect the whole region. Perhaps more important, though, is that Venezuela is a major giver of aid to the Caribbean and Central America through PetroCaribe. PetroCaribe offers oil to a majority of Caribbean and Central American countries at preferential terms and often in exchange for other commodities or with extremely long-term payment plans with very low rates. For the energy poor countries participating in the program, PetroCaribe is an important economic policy that helps shield them from high and volatile energy prices. However, as the situation in Venezuela worsens, its willingness to be generous with its neighbors will likely dissipate. Guatemala has already left, citing increasingly unappealing conditions and major revisions to the terms for other countries are certainly possible. This could be devastating for several countries. Jamaica, is particularly vulnerable, as it gets most of its power from imported oil and its economic situation is so fragile that a sudden increase in the price it pays for oil could mean an economic crisis.

2. El Pacto por México

This could be formulated in several different ways, focusing on the presidency of Enrique Peña Nieto in general or the series of reforms passed in the latter half of this year. The Pacto por México is best, however, because it encapsulates the important reforms that were passed and represents an important moment of civic responsibility from Mexico’s political class.

The Pacto was an agreement signed by all of Mexico’s three major political parties, the Partido Revolucionario Institucional (PRI), Peña Nieto’s party and the dominant force of Mexican politics from the end of the Mexican Revolution until 2000; the Partido Acción Nacional (PAN), the center-right opposition party which broke the PRI’s stranglehold on power by winning the presidency in 2000 and 2006; and the Partido Revolucionario Democrático (PRD) a left-wing part which finished second the past two presidential elections. The three parties agreed to work together to pass a series of reforms relating to education, telecommunications, taxes and the sacred cow of Mexican politics, the energy sector. This agreement came after two sexenios in which the PRI did everything it could to stymie the legislative agendas of the PAN presidents. For the three parties to agree to work together was momentous. Even more momentous was that the Pacto held together and passed all of the reforms plus a political reform despite often acrimonious negotiations—the PAN nearly abandoned the Pacto after the tax reform was passed, potentially killing chances for energy reform, and the PRD eventually abandoned it during the energy reform process.

The reforms passed via the Pacto were also largely considered to be successful. Apart from the tax reform—which has been criticized for failing to raise sufficient new revenue, among other things—the reforms were viewed by analysts as being significant positive changes which will make Mexico’s economy more productive in dynamic both in the short and long term. There remains significant secondary legislation to be passed in 2014 that will really define the scope of the reforms. But as it stands now, Mexico’s monopolistic and uncompetitive telecommunications sector will be opened in earnest to outsiders and subject to real regulatory scrutiny, the quality of primary and secondary education should improve dramatically in the coming years and the moribund energy sector will be liberalized more than all but the most optimistic dared hope six months ago.

Through the Pacto por México, Mexico proved that the different political parties in the country can work together productively and in the process passed a series of structural reforms that could power the Mexican economy in the future. Considering that Mexico already has the second largest, and by many measures, most dynamic economy in the region, this could be historically significant as the moment Mexico pulled away from the rest of Latin America economically.

3. Street Protests in Brazil

The massive street protests that erupted during the Confederations Cup over the summer likely marked a turning point for governance in Brazil. The protests initially stemmed from a hike in bus fares but quickly morphed into generalized protests against many of the perceived failings of the state, including corruption, misplaced spending priorities (World Cup and Olympics instead of hospitals, for instance) and the poor quality of government services. Many observers have celebrated the protests, arguing that they mark a maturation of Brazilian society into one with middle class attitudes which demands a higher standard from its government. This is probably the best way to interpret it (and also similar protests in Chile and Colombia) but also underscores the difficulty that the government in Brazil will face going forward. These protests arrived right as the bonanza of the past decade looks to be ending. The commodity supercycle which benefited Brazil so much looks to be ending and commodity prices will rise much more slowly in the coming years than they did since 2002, if they rise at all. Indeed, Brazil’s leaders are going to be representing an increasingly demanding society at a time when they will have much less room to maneuver than they did. Coupled with major structural issues with the economy that must be addressed and which will require unpopular measures to correct, Brazil’s leaders will have a much more difficult decade ahead of them than the one they left behind.

4. Honduras’s presidential election

Honduras itself is a small, impoverished and politically weak country in Latin America, but following its most recent presidential elections, it continues to be a flashpoint in the region over what exactly counts as democracy and political legitimacy. Since Manuel Zelaya was removed from power in a coup in 2009, Honduras has served as the main battleground over the various ways that democracy is understood in the region. For many on the right, particularly in the United States, Zelaya’s flirtations with Hugo Chávez and his disregard for a Supreme Court ruling saying he could not push forward with a non-binding referendum over allowing future presidents to seek reelection made him a threat to democracy and his removal from power an act to protect democracy. For others, particularly the leftist presidents of the region, Zelaya’s removal was a gross injustice and invalidated the legitimacy of the already scheduled elections that brought conservative Porfirio Lobo to the presidency in November, 2009. These same debates played out in Honduras as well, and Lobo limped through his term with little support, domestically or internationally, while violence continued to spiral out of control.

The most recent elections last month did little to ameliorate the situation. Juan Orlando Hernández of the conservative National Party was declared the winner with 36.89 percent of the votes while left-wing candidate Xiomara Castro of the LIBRE party—and Manuel Zelaya’s wife—finished second with 28.78 percent and the Liberal party and Anti-Corruption Party received 20.30 and 13.43 percent respectively. The results have been met with suspicion by many on the left, and Castro has disputed the results saying that there was massive fraud, intimidation and vote-buying that cost her the election. Zelaya, for his part, won a seat in the National Congress and has announced his intentions to pass a series of major reforms to strengthen the opposition parties in the legislature.

However tainted the election results were—and for their part, the OAS and UN say it was fair enough—it is virtually impossible to imagine that Castro won more than 35 percent of the vote. Similarly, the leading party in the National Congress won only 31 percent of the vote to win 48 of the 128 seats. In fact, no political force in the country won more than a third of the votes, yet both Castro and Hernández behave as though they won a resounding majority. It is here that the competing ideas of democracy play out most strongly. Most salient is the amount of power winning an election gives you. In many places in Latin America, the perception is that if you win 50 percent plus 1 of the votes (or in some cases just a plurality) you are given carte blanche to govern however you chose without having to listen to or respect the voices of the rest. This stands in stark contrast to the idea of democracy epitomized by the Pacto por México, where the opposition is given a real say in governing. Honduras certainly seems to be opting for the former understanding, with both sides claiming victory and attempting to impose their will upon the other side, though successfully achieving such an outcome in such a heavy polarized country will be difficult without resorting to strongly anti-democratic measures.

5. Uruguay legalizes marijuana

During the presidency of José “Pepe” Mujica, Uruguay has emerged as the most socially progressive country in Latin America. Mujica has signed laws that decriminalized abortion during the first 12 weeks, allowed for gay couples to marry and, most controversially, he signed a law earlier this month that legalized marijuana for Uruguayans through the state control of the industry. Legalization of marijuana, and perhaps other narcotics, has become a cause célèbre among Latin American former presidents and those opposed to the drug war. However, no state had ever legalized its sale and consumption—though two states in the US have and several other places have decriminalized possession and consumption, though not its sale. Within official circles in the United States, Europe, Latin America and the UN, legalization has been viewed as a radical idea. Uruguay’s decision, therefore, represents a very direct challenge to the conventional wisdom that has governed drug policy around the world for the past century and, if it proves reasonably successful, could serve as a model for other countries who increasingly are frustrated with the negative externalities of drug prohibition.

Si fuera tan fácil…

Even Maduro knows better.

Even Maduro knows better.

Now that the municipal elections are over and Venezuela faces an unprecedented-during-the-Chavez-era period of at least 18 months without an election, speculation is mounting that Nicolás Maduro will use the relative freedom of action that gives him to make some politically difficult, but economically necessary reforms. On Tuesday of last week, the Hugo Chávez’s former planning minister Felipe Pérez Martí wrote a guest blog post on the Financial Times beyondbrics blog exhorting the need for reforms to avert a crisis and outlining a series of more or less orthodox macroeconomic reforms that Maduro should take. Francisco Toro was very critical of the post, arguing that his reforms essentially amount to suggesting that Maduro could solve the problems afflicting chavismo and save it with just a couple easy steps, with step one being: stop being a chavista. Then Mark Weisbrot responded to some of Pérez Martí’s criticism and bizarrely argued that monetary emission has nothing to do with Venezuela’s inflation—and argues that that type of monetarism is some sort of fringe ideology on the right—meaning that it’s all a result of the exchange rate controls which could easily be fixed.

There’s a lot to dissect in all of this, but Pérez Martí is absolutely right that Maduro will need to address the macroeconomic distortions he identifies if Venezuela is to avoid a severe crisis and that they will likely take a form similar to what he outlines. However, Toro’s critique is salient. Hugo Chávez dedicated a lot of political discourse toward critiquing neoliberalism and establishing his political ideology as being in opposition to neoliberalism. Pérez Martí is ingenuously suggesting that Maduro adopt a set of reforms that would, in essence, amount to a neoliberal adjustment similar to the paquetazo in 1989 that sparked the Caracazo riots and galvanized Hugo Chávez’s 1992 coup attempt.

As Toro points out, and as I’ve argued multiple times on this blog, when you build your entire political economy in opposition to orthodox economic policy, once that political economy stops working, you’re left with very few politically tenable options. That’s how you end up with the mess that is Venezuela’s political economy. The solutions may seem simple—end currency controls, reform the tax code, stop monetizing the deficit—but untangling the mess leads to further economic dislocations that upset the pueblo and requires adopting policies that alienate your ideological base. That’s hardly the type of advice a weak leader staring down an economic crisis wants to take.

That makes Weisbrot’s response to Pérez Martí all the more bizarre. As usual, he tears down the straw man that the whole world has been predicting collapse since day one, because a fringe that has always argued that the government was on the precipice proves that people who look at 50 percent (and rising) inflation, 20 percent scarcity, and an unknown quantity of largely illiquid reserves now are just the same scare-mongers from before. After that, he goes on to say that “the most urgent problems can be fixed with a change in the exchange rate regime.” This is because, in his view, the monetization of the deficit and the accompanying huge increase in the money supply has nothing to do with Venezuela’s inflation problems.* Even accepting his (wrong) assertion about the monetary expansion, his blithe confidence in the efficacy of an exchange rate shift to solve Venezuela’s problems doesn’t stand up to simple scrutiny.

Put simply, if all it would take for Maduro to control Venezuela’s accelerating inflation was a simple tweak to the exchange rate regime, the government would already have done it. The idea that the government would tolerate 50 percent inflation in the lead up to an important election and then adopt radical price control measures when all it has to do is adjust the exchange rate regime is ludicrous. The only way Weisbrot can mean this that makes any sense is if he literally means the process of adjusting the exchange rate system would be something the government could just do—that would just require publishing a decree in the Gaceta declaring an end to the currency controls. The actual adjustment, however, would be hugely disruptive. The gap between the official rate and the black market rate is running near 1,000 percent, and even assuming there is a significant transaction cost premium in the black market price, that’s still a potentially catastrophic adjustment that would almost surely trigger a spike in inflation and a collapse in real incomes. Venezuela could try (as it certainly appears to be) to ease down the gap through a series of microdevaluations, but that runs a severe risk of depleting the reserves, triggering a sudden adjustment once the government is forced to abandon the crawling peg (think Argentina in 2002).

Venezuela is going to go through a painful adjustment eventually. The economy is simply too distorted in too many different ways to gently untangle the mess without causing a lot of short term pain. While the reforms are simple to describe, they will not be simple to implement and that fact explains why Madurocontinues to address the problems by creating more controls rather than just making the needed reforms—though there is some evidence that he really believes the crazy things he says.

* Weisbrot’s dismissal of the effect of monetary policy on inflation reads like someone who is completely unaware the 70s happened in the West or the 80s and early 90s in Latin America. Most mainstream economists, not just Republicans and Libertarians, have incorporated the importance of the money supply to inflation into their models (unless Paul Krugman counts as a right-leaning economist now). Moreover, his argument that since quantitative easing hasn’t caused inflation in the US that monetary emission can’t be causing inflation in Venezuela completely misses the fact that in the US is in a liquidity trap; a situation that most certainly doesn’t describe Venezuela.