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Green Shoots Lurk in Latin America’s Lost Decade

Mac Margolis

(Bloomberg Opinion) -- Most anywhere you look in Latin America, ruin prospers. Violence? South and Central America and the Caribbean are home to 44 of the world’s 50 most murderous cities. Economic torpor? Latin America clocked its lowest growth in seven decades from 2014 to 2020. If currencies are a nation’s share price, then Latin America at year’s end looks like a global penny stock.  

Blame Latin America’s paltry labor productivity (a quarter that of its emerging market peers) or its dismal schooling (15-year-olds are three years behind their counterparts in rich-world OECD countries). Never mind inequality (only 16% of Latin Americans see wealth distribution as fair), where the nations from Mexico to Chile are world-beaters. No wonder the headline across Latin America is of yet another lost decade.

Ten years ago, it was another story. The region was surging (indeed, Brazil was rocketing) ahead. Poverty had plunged and the chasm between haves and have-nots narrowed as never before. Latin America finally had grown a middle class.

Now that downward mobility is back, it’s tempting to conclude that the 2000s were an optical illusion, and that Latin America has simply defaulted to backwardness and want. Yet today’s ugly landscape overshadows some solid advances. Green shoots of civic rectitude, social justice and transparency in government poke through the gloom. If well tended, they could help Latin America revive and even flourish.

Start with attitude. Spasms of civic unease have seized Latin America in recent years, culminating this year in open revolt, as societies recoiled at misrule, unearned entitlements and elected officials who flouted the law to feed at the public trough. The turmoil arguably risks destabilizing politics, but not democratic collapse. The waves of protests rolling over the region since 2013 suggest an indomitable, sometimes unruly public, with a visceral aversion to inequities and zero tolerance for corruption. “This was the decade of the awakening of the Latin American opposition, and when democracy refused to die,” said Javier Corrales, a historian at Amherst College.

Granted, national governments responded belatedly or badly to spreading protests. Ecuador’s Lenin Moreno fled angry crowds in Quito, the national capital, for a friendlier coastal city before rescinding an austerity package. In Chile, President Sebastian Pinera declared that the country was at war with demonstrators, only to backtrack days later, apologize and sack his cabinet. One honorable exception to the clueless official reaction was that of the Organization of American States: Beginning in 2015 under the watch of Secretary General Luis Almagro, it no longer looked the other way when hermanos became autocrats. Led by Almagro, regional diplomats stood up to the increasingly disastrous rule of Venezuelan President Nicolas Maduro and played a pivotal role in probing electoral fraud and calling a new election in Bolivia. “The O.A.S. came back from the dead, transforming from a useless body to a herald of transparency and transition in Bolivia, and a defender of the democratic opposition in Venezuela and Bolivia,” said Corrales.

Moreover, for all the talk about the military’s return to positions of political power, Latin America’s armed forces notably have held back. The generals serving rightwing President Jair Bolsonaro are the house moderates. In Argentina they mind their business. The armed forces in Ecuador, Peru and even Chile took action when besieged national leaders called, but knew better than to hang around and take the fall for fumbling civilians. Bolivia’s military may have overreached by showing President Evo Morales the door, but did not step through it.

The Americas’ economic record is less inspiring. Latin America has spent the last decade missing opportunities. As the region has rushed to feed China’s demand, raw materials continue to represent a disproportionate share of national wealth — a formidable speed bump to economic diversification. Latin America’s dependence on natural resources rose from 43% in 2003 to 60% at the end of the commodities boom in 2013, leaving more than half the region indentured to natural resources. Even as other emerging markets gained on developed nations, Latin America’s gross domestic product per capita has all but stagnated, the McKinsey Global Institute reported earlier this year. While 56 million people climbed out of poverty during the commodity boom, poverty and outright indigence were higher in 2018 than they were a decade earlier.

The good news is that China, the region’s biggest trade partner, is shifting its one-track trade focus from commodities to investment in infrastructure, banking, ports and processing industries as it takes the Belt and Road strategy deeper into the Americas. Energy generation and distribution and ride services like Didi Chuxing are part of China’s new deal with Brazil and beyond, indicating that Beijing has become more discerning about its stakes in the Americas. “The Chinese are sharper creditors and increasingly reluctant to throw money to sinking ships,” said Boston University economist Kevin Gallagher, a specialist in China and Latin America. Encouragingly, thanks to the broadening Chinese investment, Latin America may be learning to deal with, and not just submit to, the dragon. “Some countries are approaching China with eyes wide open,” said Margaret Myers, a China specialist at the Inter-American Dialogue. “They don’t want to repeat Sri Lanka´s predicament, where China’s involvement is seen as putting national autonomy is at stake.”

Frustration over the decade’s economic failings also has fueled creative discontent. The turmoil sweeping Latin American capitals and engulfing political leaders has had some salutary policy effects. In a recent study of nine emerging markets and three developed countries hit by protests, Oxford Economics found that rather than paralyzing government, mass demonstrations “were generally conducive to bolstering the constituency for stabilizing reforms,” and in this way “may have even taken over some of the role markets used to play as a disciplining device.” In Chile, protestors pierced the veneer of complacency over the presumed blessings of unfettered markets, forcing national leaders to see social exclusion as a driver of underdevelopment and political instability. Outrage in Bolivia over apparently stolen elections could help build a consensus for firewalling democratic institutions against autocrats. “Sometimes disruption needs to happen to get some improvement,” Oxford Economics’ emerging markets analyst Gabriel Sterne told me.

Popular revolt can also presage economic overhauling. Consider Brazil, where governments spent lavishly through boom and bust, generating the worst recession on record. In the blowback, a political consensus favoring economic realism emerged. While fiscal fraud may have been the partisan expedient for getting rid of Workers Party President Dilma Rousseff in 2016, her impeachment served as an all-purpose warning to profligates. “Economic rout laid bare Brazil’s failed economic strategy and drew the line for fiscal irresponsibility,” said Fernando Schuler, a political scientist at the Sao Paulo business school Insper. “That cleared the way for congress to pass the government spending cap and pension reform – major decisions showing that institutions are important for economic stability.”

It’s too early to say whether the same constraints will prevail in Argentina, where the fallout from the misbegotten free-market reforms of Mauricio Macri swept Alberto Fernandez and the spendthrift Peronists back into power. In Argentina as in Brazil, Chile, Ecuador and Mexico, chronic economic under-performance and rising demands of social redress will pressure revenue-scarce governments to fund  safety nets worn thin by austerity and misfortune.

The trick will be to stay solvent while paying out overdue social dividends. Fortunately, even the most free-spending leaders recognize that bondholders and investors can exact a heavy price for dirigisme and blank-check policymaking. “We’ve seen that movie before and it isn’t pretty,” said Alberto Ramos of Goldman Sachs.

Here is where the street can introduce a formidable learning curve. Once tolerated as the grease on capitalism’s gears, graft and the capture of public institutions now loom as a direct threat to safety nets — a trigger for popular revolt and prosecutorial action. Transparency International found in an 18-country survey that 65% of Latin American believe their government is run by private interests. The good news: 77% of those polled also said they believed that ordinary people can make a difference in fighting corruption.

More than anger, this broad concern for social wellbeing also is driving the public conversation. Fighting poverty and inequality are no longer exclusively the purview of earnest citizens and nongovernmental groups. Part of the economic tragedy of the second decade of the century was seeing the previous decade’s advances evaporate. “Twenty per cent of human development progress was lost through inequalities in 2018,” the United Nations development program administrator Achim Steiner said in a speech earlier this month. Outrage over inequality now shapes public debate and keeps authorities on a tether. Even the International Monetary Fund has become more fluent in the grammar of the Gini coefficient and poverty mitigation.

Minding the gap between highest and lowest earners is more than good samaritanism. It’s smart economics, predicated on the conviction that inequality undermines long-term growth. By committing to more inclusive economies, Latin America could reap a 50% gain in gross domestic product and a $1,000 per capita income increase by 2030, McKinsey concluded.

Next decade’s agenda is hardly trivial. A close look at the recent social turmoil suggests that discontent arises not solely out of privation but often after a period of rising prosperity and mobility that has whetted public appetites. Likewise, people turn on leaders who socialize misgovernment by passing along the cost of fiscal folly though taxes, inflation or austerity.

The message to the next crop of Latin American leaders is hard to miss. Politicians who fail to deliver well-being or to engage local constituencies in policy decisions are a perishable species. “Until 2013 or so, sitting politicians in Central and South America generally got a pass,” said Corrales. “Now, there’s far less of a tendency to give a blank check to incumbents.”

There’s no guarantee, of course, that new leaders will be any less tone deaf than the lot that squandered opportunities of the 2000s. It will fall to Latin America’s newly ignited publics to hold them to account and lock in the goods of another decade before it passes.

To contact the author of this story: Mac Margolis at mmargolis14@bloomberg.net

To contact the editor responsible for this story: James Gibney at jgibney5@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”

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