Argentina

Harvard’s inimitable Matthew Stephenson this week published a thought-provoking blog post comparing anticorruption efforts in Asia and Latin America. Crudely summarizing Stephenson’s argument, a few years ago many looked to Asia as the gold standard in anticorruption efforts, in part because of the success of independent and effective anticorruption agencies (ACAs) in the region. But recent news of political meddling with Hong Kong’s ACA, brazen kleptocracy in Malaysia’s state development fund, and efforts to water down reform in Indonesia all suggest that the pendulum is swinging in a less positive direction. By contrast, Stephenson is optimistic about the important gains made in recent years in Latin America, including by Guatemala’s International Commission Against Impunity (CICIG), Brazil’s Car Wash investigation, elections in Peru and Argentina that highlighted voter frustration with corruption, and Mexico’s “3 out of 3” reforms. As Stephenson was careful to note, it is dangerous to generalize across regions. The on-the-ground details in each country get in the way of blanket statements about how regional anticorruption efforts are playing out. I agree, and I would go further. An additional caveat that the anticorruption community should keep in mind—even while celebrating successes—is that the effectiveness of anticorruption efforts is only really evident over the long haul. This is in large part because by their very nature, anticorruption reforms tend to generate significant pushback. Anticorruption reforms are never really complete: even independent and well-functioning institutions can decay over time, under pressure from the powerful interests that benefit from, and are empowered by, corruption. Incipient anticorruption reforms are even more vulnerable to regression. Latin America has indeed been making enormous strides forward in recent years, under a remarkable set of homegrown anticorruption campaigners, but resistance appears to be building against those who would reform the system. In recent years, a cautiously optimistic story could be told about Brazil, in light of the incremental anticorruption gains of the past generation. But recent developments suggest that these gains are under threat. Clientelistic parties and opponents of reform in both the Rousseff and Temer administrations have introduced proposals—both via decree and through legislation—that would weaken prosecutors and judges and considerably undermine the transparency of court cases, institute a tax amnesty law for repatriation of foreign holdings, restrict corporate leniency agreements, and limit plea bargaining. Although some of these proposals are framed as a seemingly reasonable effort to block the “abuse of authority,” they would have a chilling effect on the nascent—and still very uncertain—efforts to tackle corruption in Brazilian politics. Equally important, a set of necessary anticorruption reforms pushed forward by prosecutors, and placed on the legislative agenda with the support of 2 million citizens, has been stymied by congressional foot dragging. Acting president Michel Temer, who has now been mentioned twice in the Car Wash investigation, has adopted what is at best an ambiguous attitude toward anticorruption efforts, appointing a cabinet that is staffed by a number of unsavory characters, and failing to exert even an ounce of energy in support of reform. In Guatemala, the UN-backed CICIG is in danger of becoming a victim of its own success. The easy criticism is that due to the presence of an international body like CICIG, Guatemalan institutions have not been under pressure to reform themselves. This is too facile, if only because there was never any sign that Guatemala’s institutions would be able to reform on their own, and CICIG’s presence seems to have empowered Guatemala’s prosecutors. The remarkable former attorney general, Claudia Paz y Paz, moved against some of the most powerful figures in Guatemalan history, and the prosecutorial service has gained new staff, prestige, and resources. Yet the genocide case against former president Efraín Ríos Montt was overturned by the high court, and there are fears that the court might be similarly timid in addressing corruption charges against former President Pérez Molina and his vice president. Meanwhile, President Jimmy Morales has been slow to build on anticorruption successes, and in fact, the early days of his administration have been marked by a surprising willingness to compromise with questionable elites. One of the few barriers to regression has been the mobilization of the Guatemalan public, which has encouraged the appointment of a few reformers in the Morales administration, and which will be essential to ensuring the success of a planned judicial reform package to be drafted later this year. In Mexico, the “3 out of 3” reforms were a huge deal, not least because for months they seemed to be destined for the trash bin, after Institutional Revolutionary Party (PRI) legislators delayed their consideration and then attempted to sink them with a poison pill. As my colleague Shannon O’Neil pointed out, voter concern with corruption was one of the driving forces behind the PRI’s historic loss in the June gubernatorial elections, and the effort to move forward on the reforms may have been the PRI’s attempt to get out ahead of the corruption issue before the 2018 presidential elections. Yet just this week, news has emerged of the Mexican first lady’s luxurious vacation digs in Key Biscayne, which it now turns out are owned by a company that will be bidding for Mexico’s port business. This after another contractor sold the first lady her $7 million Mexico City mansion in a controversial transaction two years ago. Old habits die hard, even though public asset disclosure requirements in “3 out of 3” were aimed at curbing exactly this type of abuse. There is no reason to be a sourpuss. Latin Americans should be justifiably proud of the remarkable gains of recent years, and Stephenson is right to point out their relative success compared to the current backsliding in Asia. But the common thread running through the recent Brazilian, Guatemalan, and Mexican country experiences is the importance of citizen engagement: without public pressure, politicians tend to revert to old practices. Before he became one of the most famous judges of all time, Sérgio Moro wrote an academic paper on the Mani Pulite investigations of corruption in Italy, which noted that “judicial action against corruption is only effective with democratic support.” He concluded this after observing that when public attention turned away from the corruption investigations in Italy, politicians did all they could to make prosecutors’ lives more difficult: they strengthened evidentiary protections, decriminalized accounting fraud, reintroduced parliamentary immunity, and reduced statutes of limitations in corruption cases. It is probably unrealistic to expect Latin American publics to remain engaged on anticorruption: at some point, there may just be too much bad news, or the news may be too destabilizing to everyday governance, or the corruption effort will be seen as a partisan crusade, or the news that there is corruption in high places will no longer galvanize a weary public. Efforts to eradicate corruption will always be a game of inches, and the politicians who would like a return to the old status quo in Latin America have only just begun to fight.

It is Latin America’s anticorruption season. Deep beneath the waves of revulsion about scandal, graft, and the general filthiness of local politics has been a profound concern with democracy. In particular, there is a growing awareness that the dangerous liaisons between corruption and electoral finance threaten the stability and legitimacy of elected governments in the region. While there is plenty of good news about the impressive corruption busters who are shaking up settled patterns of corruption and impunity in the region, many of the underlying links between corporate transparency, corruption, and campaign finance remain deeply troubling and potentially destabilizing. Of eighty-seven companies mentioned in the FCPA Blog’s most recent Corporate Investigations List—a count of companies whose public filings with the Securities and Exchange Commission reveal that they are the subject of an ongoing and unresolved investigation under the Foreign Corrupt Practices Act—fully twenty-six are Latin American. Given that Latin America accounts for only 7 percent of the global economy, the fact that it accounts for 30 percent of current enforcement actions is impressive. Equally remarkable is that Brazil alone accounts for more than one in five of the companies on the list. Of course, enforcement actions by U.S. regulators only target companies traded on the U.S. markets. The longstanding prevalence in Latin America of closed companies and conglomerates controlled by single families means that many regional corporate leaders are not publicly traded, much less traded on U.S. stock exchanges where they would be susceptible to U.S. regulation. Furthermore, it might be argued that much corruption is simply illegal enrichment, and does nothing to fund campaigns. But personal enrichment often comes at the cost of private-regarding policies. More damaging still is that as companies across the region increasingly expand beyond their domestic markets and into neighboring economies, they sometimes carry with them the nefarious practices of political influence-peddling that helped them dominate at home. By way of example, Odebrecht, the once-massive construction firm at the heart of Brazil’s Lava Jato case, has expanded significantly to neighboring countries since the turn of the century. In its baggage train it carried significant campaign contributions, whether to Peruvian candidates with a role in the construction of massive interoceanic highways, or to Panamanian politicians with influence in over-priced public works projects. Recognizing the dangers of corruption to electoral competition, the investigations that have swept the region in recent years have triggered a variety of changes in domestic laws aimed at destabilizing the nexus between politics and corruption. These include a ban on corporate donations in Brazil, a similar ban combined with campaign spending limits in Chile, and this week, after months of heavy civil society prodding, transparency requirements for politicians and the strengthening of anticorruption bodies in Mexico. But as a Transparency International report published earlier this month demonstrates, emerging market multinationals are lagging behind in the push for greater corporate transparency. Publicly listed companies do better than privately held companies, but overall, the results show that less than half of the emerging market multinationals are transparent about their internal anticorruption programs; only 47 percent report transparently on their holdings and subsidiaries in other countries; and a measly 9 percent report on their activities in other countries even though, on average, these multinationals have operations in twenty-six countries each. Latin American multinationals account for about a fifth of the index, and they perform about 10 percent better than the (abysmal) index average. But given that their home countries—Argentina, Brazil, Chile and Mexico—are all democracies, and half of the multinationals in the global sample are from non-democratic countries, perhaps we should expect even better from the multilatinas? Further regulation and red tape may have perverse effects, of course. But increased corporate transparency standards, especially if adopted voluntarily, might prove to be a competitive advantage, especially as the regulatory environment in Latin America is tightening anyway under citizen pressure. Under these new conditions, both multinationals and smaller firms in the region may see improved transparency standards as a way of simultaneously enhancing domestic politics in their home countries and improving their business prospects abroad.

In my piece published this week on Foreignaffairs.com I reflect on Argentina’s and Brazil’s current political and economic situations. I argue that while their current challenges are their own, a potential long-term solution to their problems comes from each other—namely working to build an integrated South American economic hub. You can read the first two paragraphs of the article below: This year has been a rough one for South America’s two largest states. Brazil—once lauded as a rising global power—has fallen deeper into recession and political turmoil. And although Argentina is finally attempting to transform itself into a model of sober pro-market governance after years of Peronist populism, it shares with its northern neighbor a grim set of economic and political indicators: stagnating growth, endemic corruption, and a new government beset by high expectations. As a result, Argentine President Mauricio Macri’s initially high approval ratings have declined since he took office in December. In Brazil, meanwhile, interim President Michel Temer comes close in unpopularity to the disgraced Dilma Rousseff. Despite their undeniable problems, however, there remains in both countries a cause for optimism. Argentina and Brazil are, for now, absorbed in their own domestic dramas, but they have within easy reach the long-term solution to their economic woes: each other. You can read the entire piece as it appeared on Foreignaffairs.com here.

Mercosur is under considerable internal strain. As at other times in the trade bloc’s history, shifting political winds and changing trade priorities have placed the member countries at loggerheads. The five-member organization is in the midst of what is perhaps the most severe of its periodic identity crises, exacerbated by the Left’s waning power in the region, the rise of the Pacific Alliance, and renewed member interest in external trade agreements. The most immediate cause of the current tension is the possibility that Venezuela might be given the next six-month term as rotating chair of the organization as early as next week. Foremost among the concerns this raises is the possibility that Venezuela might get in the way of ongoing talks with the European Union (EU). But also lurking in the background is the possibility that with Venezuela in the chair, it will be harder to invoke Mercosur’s “democratic clause” against the Maduro government, which has descended into seemingly intractable crisis and appears intent on sidelining its opposition in a variety of increasingly autocratic ways, including threats to dissolve the National Assembly. Paraguay has called for barring Venezuela from the chair outright. Uruguay seems intent on upholding the pre-established timetable for rotating the chair, noting that Maduro has not yet acted on his threat against the Assembly. In an emergency mission to Montevideo, a delegation led by Brazilian foreign minister José Serra pushed an intermediary solution, noting that Venezuela has not yet met the terms of Mercosur accession, which it must complete by August. Until it has met the terms of membership, Venezuela would not be eligible for the chair. Argentina has said that it will happily take the chair in the interim. Brazil’s criticism of the Venezuelan regime’s human rights record and calls for a referendum on Maduro were met earlier this week by the full twittering firepower of the Venezuelan foreign minister. Delcy Rodríguez let loose a barrage of criticism of the “insolent” and “amoral” statements of her “de facto” colleague, Brazilian foreign minister José Serrá.  For good measure, she alleged that Brazil has joined the “international right” in its efforts against Venezuela, and called attention to the ongoing “golpe” in Brazil. Caught up in her twitter tantrum, Rodríguez did not make the stronger argument in Venezuela’s favor: namely, that Brazil’s justifications for temporarily suspending Venezuela seem contrived, given that Venezuela has been permitted to chair the organization once before, and Mercosur has been famously tolerant of member violations of its rules. Ultimately, the tension within Mercosur is an expression of deeper political changes, including most especially, the shift away from leftist governments with the arrival of the Cartes administration in Paraguay, Macri in Argentina, and Temer in Brazil. The Cartes government harbors deep resentment of the Maduro administration, not least because Paraguay was suspended from the trade bloc under the democratic clause from 2012 to 2013 after the (admittedly questionable) impeachment of Fernando Lugo. Particularly galling to the Paraguayans is the fact that they have staked a great deal on Mercosur—more than 40 percent of imports and 20 percent of exports are to Paraguay’s non-Venezuelan Mercosur partners—even as the Venezuelan Johnny-come-lately seems intent on using the bloc largely as a platform for its regional political pretensions. Lost in the political scrum is trade. From this perspective, Mercosur continues to be an ambivalent accomplishment. The trade bloc has increased trade among the member countries, but also imposes opportunity costs in terms of foregone trade agreements elsewhere. Meanwhile, although trade today is higher than it was at Mercosur’s inception, it is lower as a percentage of total trade than it was at the peak of intra-Mercosur commerce in the late 1990s. Recognizing this, Argentina and Brazil had already exchanged a number of high-level visits this year before Rousseff’s impeachment, and more recently, Foreign Ministers Serra and Malcorra have reiterated their interest in improving bilateral exchanges and reviving Mercosur. Mercosur, though, has had enormous difficulty in moving forward on outward oriented trade agreements, including a deal with the EU. Prospects for such a deal might be more positive than in years past, given the rise of the pro-trade agenda in Brazil and Argentina. But the fact is that the EU is—to put it mildly—distracted at the moment. Closer to home, too, the Pacific Alliance is exerting an enormous pull on some Mercosur members. Argentina’s Macri will be a guest at the Pacific Alliance’s presidential summit later this month, and Chile in particular seems eager to build bridges to members of Mercosur. The foreign ministers of the four original members of Mercosur will meet on Monday, July 11, to discuss the situation in Venezuela. Pushed by Uruguayan foreign minister Rodolfo Nin Novoa, they seem unlikely to invoke the democratic clause against Maduro until or unless there is a more concrete violation of democratic norms. Whatever happens Monday, however, the newly proactive Mercosur is likely to be back in force by early 2017, when Argentina is scheduled to take the helm, beginning a succession of chairs from the center-right governments of Argentina, Brazil and Paraguay. This has the potential to kickstart the most active eighteen-month window of change in Mercosur since the bloc’s formation in the early 1990s. If it succeeds, Mercosur’s potential may be resurrected.  If it fails, the bloc’s long-term prospects will be increasingly in doubt.

April and May brought some of the most important movement on the anticorruption front of any two-month period in the past decade. Recapitulating briefly: - In April, the International Consortium of Investigative Journalists (ICIJ) began release of the Panama Papers, roughly 11 million leaked documents from the Mossack Fonseca law firm detailing the creation of more than 15,000 shell companies and providing information on more than 200,000 offshore entities. The lists touched on a variety of presumably legal uses of offshore firms, but also sprayed egg on a number of prominent faces, including in Russia, Ukraine, China, the United Kingdom (UK), Spain, Chile, Argentina, Iceland, and within the International Federation of Association Football (FIFA), among others. A follow-up manifesto by John Doe, the whistleblower at the heart of the leak, noted the extensive use of offshore accounts as part of a system of “massive, pervasive corruption” in the global economy. If nothing else, the Panama Papers have introduced the concept of “beneficial ownership” to a broader public, and fomented a larger discussion of how the West enables corrupt practices through loose monitoring of offshoring and financial disclosure. - The reports were followed in May by measures by the Obama administration to “combat money laundering, corruption, and tax evasion…,” stimulated in part by the Panama Papers, as well as the impending UK Anti-Corruption Summit (below). Among the administration measures were proposals to strengthen anticorruption efforts by requiring greater due diligence and disclosure regarding corporate ownership, and requiring foreigners setting up shop in the United States to obtain a tax identification number. Critics have noted (for example, here and here) that many of the measures will require legislative approval, which will be slow in coming, and many of the proposals do not go far enough in involving important gatekeepers in due diligence. But the Obama administration’s moves are at least a recognition of the problem, and perhaps may set the stage for future change. They also come in the wake of the announcement of much-needed increases in the human resources devoted to anticorruption efforts at both the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice. - Finally, on May 12, at the Anti-Corruption Summit in the UK moved forward, millimetrically, on a proposal for public registries and an international information-sharing center on beneficial ownership. Only six countries are fully committed to the registries project, and the United States remains aloof, but at least the idea is on the table. If nothing else, governments will need to explain what they find problematic about the idea, even if they ultimately refuse to join up. These three developments highlight the stop-and-start nature of anticorruption efforts: as so often happens in the public policy world, a small group of anticorruption campaigners have kept the issue on the table during times of relative inattention to corruption. The shock generated by the Panama Papers created a small window of opportunity for policy change, when campaigners’ ideas and proposals could be placed before policymakers briefly focused on the problem and eager to hear about ready solutions. Whether these proposals move forward will depend significantly on the support they receive against a barrage of likely opposition. Five years ago, author Nicholas Shaxson noted that the biggest tax havens in the world are islands. Islands, he concluded tongue-in-cheek, such as Manhattan and the City of London. Tax havens are estimated to hold as much as $20 trillion, more than all U.S. banks. Furthermore, the Tax Justice Network ranks the U.S. as the world’s third-easiest place, after Switzerland and Hong Kong, to set up offshore companies that can be used for everything from tax evasion to hiding beneficial ownership (more here). As Daniel Kaufmann and Alexandra Gillies and Shruti Shah have noted separately, less background information is needed to set up a shell corporation in Delaware than to get a driver’s license or a library card. Beneficial ownership rules thus may face an uphill battle against opposition from the representatives of states dominated by the financial services industry or from lawyers and business groups concerned by increased regulatory costs. Ultimately, success in moving forward in fighting the corruption that disproportionally milks many of the world’s poor will require a sustained campaign that makes it clear to voters and policymakers that it is in the best interest of the United States to staunch the flow of illicit funds around the world. The experience of the past forty years suggests a way forward. The Foreign Corrupt Practices Act (FCPA) of 1977, for example, could never have moved forward without recognition that the offshore corruption of U.S. firms was circling back home in the form of highly damaging illegal campaign finance contributions. Following the FCPA’s passage, business complained—rightly—about the FCPA’s anticompetitive effects, and pressure from business and anti-corruption groups eventually led to passage of international agreements, such as the 1997 Organisation for Economic Co-operation and Development (OECD) Convention on Corruption, that imposed similar corruption-busting regulations on other countries, generating improved conditions for clean global business. There may be costs, in other words, to being a first mover. But there is significant and clear damage to the U.S. national interest when other countries’ corporations compete with ours on an uneven playing field, when corruption weakens and destabilizes our allies, when our treasury is depleted by offshore maneuvering, and worst of all, when our reputation is sullied because we are seen as part of the problem rather than the solution. Everything should be done to reduce the regulatory burden and lessen the costs of compliance. But if there is one lesson from the Panama Papers, it is that the days of ethical neutrality about the tangible costs of undisclosed and unidentifiable offshore financial movements are coming to an end.

By all accounts, Mauricio Macri has had a remarkable honeymoon since he was inaugurated December 10, quickly moving to revise Argentina’s economic policies, restructure its relations with the world, and tackle a variety of rule of law challenges, ranging from corruption to the drug trade. President Obama’s trip to Argentina last week was in many ways the capstone to Macri’s dynamic first hundred days in office. The visit signaled a generational shift in U.S. policy toward Latin America, seeking to repair some of the worst damage done by U.S. support of the military dictatorship that took office when Obama was a teenager, but Obama and his entourage of more than four hundred business representatives were even more convincing in their strong praise for the Macri administration’s new openness to foreign investors. Indeed, Macri’s presidency has moved very quickly to change the climate. It has freed the foreign exchange market, cut government spending, fired public sector workers, raised repressed energy prices, reduced export taxes, and opened up trade. Early today, the government scored a major victory as the Senate approved legislation needed to end a fifteen-year debt dispute with creditors, paving the way for a return to international markets and demonstrating the government’s ability to corral the opposition toward pragmatic policies. The government’s rhetoric has been overhauled, shifting quickly away from the dirigiste and southern-focused language of Cristina Kirchner and her economics minister Axel Kicillof, and turning instead toward the global north and potential OECD membership. Hoping to change the tone, Macri has met the United Kingdom’s David Cameron to reassure him of his desire to improve ties between the two countries, flown to Brazil to reassure Rousseff of his desire to restart trade and revamp Mercosur, and moved toward isolating the chavista regime in Venezuela, including by withdrawing support for the Bolivarian-inspired broadcast company Telesur. For all these successes, however, the challenges Macri will face in coming months are formidable. Argentines are twice shy about economic liberalization after the deep trauma that accompanied the collapse of Domingo Cavallo’s convertibility plan and the subsequent debt default of 2002. Meanwhile, the economic situation Macri inherited is dire: high inflation, exchange rate depreciation, low foreign reserves, a primary fiscal deficit nearing 6 percent of GDP, and projections of negative real GDP growth in the coming year. Correcting the excesses of the past decade will be painful: utility and food prices are rising in response to Macri’s reforms, even as unemployment threatens, commodity prices remain low, and neighboring trading partners stagnate. Politically, Macri is governing with a bureaucracy populated by Kirchneristas and faces a court system stacked with the previous administration’s appointees. His Cambiemos coalition lacks a majority in either house of Congress, with only 15 of 72 seats in the Senate. Macri has managed to prevail in the crucial votes on debt repayment, but moving forward on deeper reforms will require him to continue to seek out common ground with portions of the opposition, such as the Frente Renovador faction of the Peronists, whose enthusiasm for radical reform is limited and self-interested. These conditions mean that while Macri represents a shift in Latin America, away from the “pink tide” of leftists who have governed the region since the turn of the century, his will not be a hard right turn. The positive upshot, as Andres Oppenheimer notes, is that Macri may be the leading edge of a “pragmatic cycle” in Latin America. But even accomplishing this pragmatic turn may be difficult until the economy and jobs creation perk up. In the interim, Macri may need to rely on symbolic and outward-looking moves that attract investment and build popular support, such as reforming Mercosur, driving forward EU-Mercosur negotiations (initial proposals are due on April 8), and perhaps even pushing a deal between Mercosur and the United States or signing on to the Trans-Pacific Partnership. Don’t be surprised if there are further surprises from Buenos Aires.

During his first two months in office Argentine President Macri pushed through reforms to eliminate currency controls, cut export taxes, and remove energy subsidies. He also appointed two new judges to the Supreme Court and enhanced the court’s oversight of security surveillance, postponed promised changes to the legal system, shuffled responsibilities within the cabinet, modified a contentious media law, and annulled a Kirchner decree transferring federal funds to the provinces. All was done without Congress, which entered its three month summer recess on November 30 (before Macri’s inauguration). This will change March 1, as the legislature comes back into session. The most immediate executive-legislative negotiation will involve the Cerrojo and Pago Soberano laws, both of which prevent Argentina from settling with holdout creditors. Last week U.S. District Court Judge Griesa agreed to lift the injunction preventing Argentina from making bond payments so long as these laws are repealed and those who settle by February 29 are paid. Another big issue will be coparticipaciones, or federal transfers to the provinces. Before stepping down Cristina Kirchner changed the rules, ordering the transfer of a previously withheld 15 percent of tax intakes back to the provinces (which Macri quickly cancelled). The administration is now negotiating a permanent end to these transfers by 2021 in return for forgiving provincial debt. Other issues include confirming the two Supreme Court justices he installed on the bench, creating a new media regulator, Enacom, and liberalizing the broadcasting industry. Though Macri’s own party holds only 42 of the 257 seats in the Chamber of Deputies, with his electoral coalition partners UCR and CC and the support of Sergio Massa’s UNA (a dissident Peronist and the second runner up in October’s presidential election), he holds the largest plurality and a near majority. Splintering within the former Kirchner FPV coalition bring another dozen congressional votes into play. His administration will benefit too from the difficult financial situation of so many provinces. Governors, and by extension many senators and representatives, are likely to support the administration in its legislative agenda as they look for federal funds and permission to emit debt to cover mounting current obligations. More worrisome for Macri’s reform agenda are the just begun annual labor negotiations. The unions are demanding 40 percent wage hikes; the government hopes to keep increases below 25 percent. Private consultants and local Buenos Aires measures suggest inflation is at 30 percent—outstripping the government’s announced expectations of 20-25 percent (the INDEC statistic agency is being revamped to meet international technical standards, so no official national numbers exist). Macri’s team already lost a first round to the teachers union, granting them a 40 percent raise. Many governors are now refusing to recognize the agreement and up teacher pay given their financial straits. Labor unrest, particularly if it leads to violence, could dent the president’s popularity, down 10 percent since his start in December. Yet granting bigger wage hikes threatens to spur inflation, increase fiscal deficits (already at 7 percent of GDP in 2015), and derail Macri’s broader economic reform agenda.

Once a year, policymakers and the press are forcibly reminded of the terrible costs of corruption. This year, it fell on January 27, when Transparency International’s Corruption Perceptions Index (CPI) was released, inciting the ritual gnashing of teeth and beating of chests about relative national corruption gains and losses. This is precisely the sort of attention that Transparency International hopes to draw to corruption. In this sense, the report is very much a continued success. But the CPI’s utility as a policy tool is less clear-cut, not least because there are so many reasons a country might rise or fall, including revelations of previously hidden corruption or simply the movement of other countries, which then push their peers up or down in relative terms. Transparency International routinely acknowledges these issues, and actively encourages readers not to use the measure as a longitudinal indicator. But this advice usually falls on the deaf ears of headline-seeking editors. The CPI remains a blunt tool, which doesn’t provide us much guidance on how and why public perceptions of corruption are changing, or broader lessons about what works in the fight for accountability. Nonetheless, there are a few important takeaways from the report that are especially relevant to Latin America. First, grand political corruption is ubiquitous and no country is immune. Shannon O’Neil pointed last year to the potentially significant political implications of the wave of corruption scandals that have beset Latin America over the past two years. These scandals have erupted at all levels of the CPI: in countries among the highest ranked (Chile, ranked 23rd of 167 positions), at the middle of the pack (Brazil and Mexico, 76th and 95th), and near the bottom (Honduras and Guatemala, 112th and 123rd). Second, if there is one policy recommendation that emerges from recent Latin American experience, it is that increasing checks and balances, granting true autonomy to watchdog agencies, and building budgetary and human resource capacities, all contribute to better control of corruption. Conversely, countries such as Venezuela in which these checks and balances have been eroded for political reasons suffer unintended consequences, including worsening corruption outcomes. Robust democracy, in other words, has some collateral accountability benefits. In the short term, improving capacity may lead to gains in corruption perceptions. One of the most improved countries in the CPI is Honduras, which rose fourteen spots, in part because of massive public protests last year that led a scandal-weakened government to acquiesce to the creation of an independent international panel of judges and prosecutors to investigate corruption: the OAS-sponsored Support Mission Against Corruption and Impunity (MACCIH), modelled on Guatemala’s UN-backed International Commission Against Impunity (CICIG). Despite its shortcomings, including fears that MACCIH may merely serve as a smokescreen to protect the president against removal, it is hoped that MACCIH will be strong enough to provide investigatory credibility in an institutional environment marked by a politically-dominated judiciary. Yet even in countries that are moving in the right direction and developing the autonomous capacity of their institutions, the perverse consequence may be the uncovering of major corruption, and a tumble in the CPI, as InsightCrime noted. Guatemala, where last year’s corruption scandal culminated in the forced resignation of President Otto Pérez Molina, declined eight spots. Brazil, where prosecutors have filed more than 1,000 charges, recovered more than a half-billion dollars, and convicted eighty for corruption associated with state-owned Petrobras, has fallen by seven spots. Let me close by floating two suspicions about the extent to which corruption will be relevant to Latin American politics in coming years. First, declining economic fortunes are likely to be accompanied by increasing revelations of corruption that was underway during the boom times. Bad economic times mean turnover in governments, closer scrutiny of past incumbents’ accounts, and an energetic scramble for tax revenue, including through tighter oversight. Able politicians may seek to deflect attention from current economic woes by pointing a finger of blame at corrupt predecessors who wasted the bonanza of the commodity boom. If the first suspicion is correct, the second follows: impunity is likely to be one of the next big political shibboleths in the region. Latin American countries have historically been a paradise for corruption; as Steve Morris noted with regard to Mexico, impunity has long been corruption’s evil twin. Impunity makes corruption much less risky and much more lucrative. A recent estimate suggests that only 3 percent of Argentina’s corruption cases since 1980 have led to convictions, and judges took on average fourteen years to reach final sentences in these cases. Of course, these dismal results are only the tip of the iceberg, since they refer only to those cases that actually saw the light of day. And it seems unlikely that Argentina is an outlier with regard to judicial ineffectiveness, although data on corruption prosecutions and trials is weak around the region. All of this suggests that for all its faults, the CPI release will continue to be closely watched throughout Latin America in years to come.

This post features Mark P. Jones, the James A. Baker III Institute for Public Policy’s political science fellow and Joseph D. Jamail Chair in Latin America Studies at Rice University, and Kellie Meiman Hock, managing partner and director of the Brazil and Southern Cone and trade practices at McLarty Associates. Latin America’s Moment recently sat down with Jones and Meiman Hock to discuss Argentina’s outlook. What economic challenges does Argentine President Mauricio Macri inherit from the Fernández de Kirchner government and how will he tackle them? Meiman Hock: Critically low foreign currency reserves represent Argentina’s biggest economic challenge. It is estimated accessible reserves stand somewhere between $2 billion and $6 billion at this time. Macri will work toward reaching a settlement with the holdouts in order to access international credit markets, but this will take time. In the near term, he will need to cut deals with the World Bank and the International Monetary Fund (IMF), which will necessitate resolving pending arbitration claims, as well as normalizing Argentine statistics. With reserves at a sufficient level, he will be better equipped to address other challenges: unifying the exchange rate, addressing inflation, loosening price, capital, and import controls, and eliminating most export taxes. Jones: In addition to anemic foreign reserves, Macri must also deal with a fiscal deficit at 7 percent of GDP this year and growing, and an overvalued peso. Macri will try to rein in rising public employee salaries and reduce expensive energy subsidies to consumers in the city and province of Buenos Aires. Are there any economic positives for the new president? Jones: Argentina is blessed with tremendous human capital and bountiful natural resources. If Macri can establish a credible rule of law and economic stability, U.S. and Argentine investors will pour funds into the development of Vaca Muerta and other shale gas deposits in addition to traditional investments in agriculture. Meiman Hock: The current situation in Brazil is both a positive and negative for Argentina. On the one hand, the economic downturn in Argentina’s largest trading partner will diminish demand for Argentine exports. On the other, if Macri can lay out a clear plan forward and build confidence, Argentina stands to attract investors currently disenchanted with Brazil and with pent-up demand for Argentina. Who will make up Macri’s government and what is his strategy for working with Congress? Jones: Macri’s eschewed a European-style coalition or even a president-dominated multi-party one à la Brazil. The government will be mostly made up of members of Macri’s PRO party. His electoral allies, the Radicals (UCR), received only a few second- and third-tier ministry positions. In Congress, Macri will try to garner some Peronist support to move legislation forward, given the PRO has only a small share of seats. But to Macri’s advantage, former President Fernández de Kirchner’s Frente Para la Victoria party is splintering and he can leverage the financial resources at his disposal to work out agreements with governors and other territorial leaders who possess considerable sway with deputies and senators from their respective provinces. Still, as the midterm elections approach in the second half of 2017, Macri will be watchful of both Peronists (including Sergio Massa), as well as the Radicals (UCR)—who realizing further PRO growth will likely come at their expense—may turn against him. Meiman Hock: Macri has chosen—at least nominally—to disperse power within his cabinet. Rather than having a traditional super minister of economy, his goal is to have several centers of power, with his trusted advisors in the presidency ensuring that, rather than a solo act, the Macri administration performs more like an orchestra. How will Macri reshape Argentina’s place in the region? Meiman Hock: Argentina under Macri will attempt to assert a new role in the region. It is telling that Macri’s first foreign trips, even before his inauguration, were to Brazil and Chile, seeking to build closer ties with the two countries. We can expect that Macri will be tougher on Venezuela, and will also leverage Argentine participation in the G20 to make a splash on the world stage. Jones: With the United States, Macri will work to reestablish a stronger relationship. Under former President Fernández de Kirchner, things could not have been much worse. But Macri’s team will have to be strategic in the rapprochement as their hands are tied somewhat by public opinion. Over half of Argentines don’t have a positive view of the United States, and even more don’t trust it. Still, the United States will have a stronger ally in Argentina on issues relating to Venezuela, drug trafficking, Iran, and the growing role of China in the region.

Mauricio Macri, mayor of Buenos Aires and leader of the Cambiemos coalition, won yesterday’s presidential run-off, becoming the first non-Peronist president in nearly fifteen years. From his start on December 10 he will face several severe economic challenges: 1. Dwindling foreign reserves Official foreign reserves total just $26 billion. Of this, over half reflects swap agreements with China and other commitments, leaving just $11 billion in liquid assets. This limited buffer will likely decline as the summer progresses, until the soybean harvest begins in March. Though the season looks bountiful, soy prices are now just half 2012 levels, lessening the benefit for foreign exchange coffers. These low levels will calculate into the government’s negotiations with holdout creditors, led by Paul Singer’s NML Capital, who collectively hold $7.9 billion in defaulted Argentine bonds. Any quick solution will require the foreign reserve benefits of settling—including inflows of new capital—to outweigh the potential outflows. 2. Diverging exchange rates The difference between the official rate—9.5 pesos to the dollar—and the black market or “blue dollar” near 15—leads to local economic distortions and discourages foreign investment into the economy. Macri has already promised to lift currency controls, an important step towards letting markets again work. But it will spur inflation—which independent economists estimate at over 25 percent already. DolarBlue.net, "Centavo a Centavo, la Devaluación del Peso," 2015. The recent sale of $15 billion’s worth of dollar denominated futures contracts by the central bank will make a devaluation more costly for the government, adding potentially $7 billion to the public debt burden. 3. Growing fiscal deficit The added public debt burden comes at a time when the government is already running a fiscal deficit equal to 7 percent of GDP (the highest since 1982). This reflects the greatly expanded state—double its size as a percentage of GDP from when Nestor Kirchner took office in 2003. A big portion is public salaries—the public sector now employs 3.7 million of the 17 million members of the economically active population. La Nacion, "El Gobierno Incorporará Este Año Más de 25.000 Empleados," 2015. 4. Slower economic growth and rising unemployment The economic outlook for Argentina is grim. The International Monetary Fund projects less than 1 percent growth for the next several years due to falling commodity prices, stagnant industrial production, and domestic economic distortions. Argentina’s largest trading partner, Brazil, faces its deepest recession since the global financial crisis, and China’s slowdown, though less extreme, has weakened demand for Argentine commodities. Private sector employment is now falling, down 1.3 percent year on year. 5. Tough politics In addition to the difficult external climate, Macri faces tough domestic politics. His coalition claims some 90 of the 257 seats in the lower house (his own party 18), meaning any legislative reforms will require Peronist support. --- Argentina holds strong advantages—including a plethora of untapped mineral deposits and the world’s second-largest shale gas reserves. Its agricultural bounty remains, and an overhaul of punitive export taxes on corn and soy should bring in more investment, boosting productivity and output, as Argentina’s crops are profitable even at lower global prices. Macri will benefit from his promises of change, and a few quick market friendly moves. His technocratic team—many trained abroad—understands this, as does the president-elect. Investors are already betting on his turnaround success—pushing government bonds up 30 percent, and the Merval (Argentina’s benchmark stock index) up over 60 percent since the year’s start. The new government looks to entice back the estimated $225 billion Argentines have sent abroad through tax amnesties and other policies. Even if a part comes back, combined with new foreign direct investment and loans (assuming Argentina comes back to world markets), this money could help revive Argentina’s over $500 billion economy.