Argentina

In a post originally published on ForeignPolicy.com, Shannon O’Neil explains what Brazil and the rest of Latin America can teach the United States about keeping unregulated donations out of elections. On September 17, Brazil’s Supreme Federal Court ruled corporate contributions to political campaigns unconstitutional. The case, brought forward by Brazil’s bar association in 2013, ends companies’ outsized influence in electoral campaigns, contributing to the country’s ongoing efforts to root out corruption. The American political system could learn a thing or two from Brazil about the dangers of letting corporate donations run amok, as the Latin American nation works to check the private sector’s influence on its elections. Since the 2010 Citizens United Supreme Court decision, corporations have been able to contribute unlimited amounts to Super PACs (they still can’t contribute directly to candidates) backing candidates running for political office. Even worse, they can also do so through “social welfare” organizations, effectively rendering their donations anonymous. As a result, corporate and anonymous contributions have grown exponentially. As of August 4, super PACs had already raised more than ten times their take at this point in the last presidential cycle. Former Governor Jeb Bush and the super PAC that backs him brought in a combined $114 million in just the first half of this year. Campaign finance laws in the United States diverge substantially from those in Latin America, which uniformly frowns on unlimited individual donations. Despite having no shortage of wealthy, politically connected men and women, these nations limit their economic power over electoral contests. Individual contributions, in general, play a small role in political campaigns in the region. Whereas a Sheldon Adelson or George Soros can effectively buy a primary candidate in the United States via donations to outside spending groups (Newt Gingrich effusively thanked Adelson in 2012 for single-handedly keeping his campaign alive), Mexican telecom mogul Carlos Slim can only donate to parties: aggregate individual contributions in Mexico can’t rise above ten percent of total party financing. Brazil is more lax: its richest man, Jorge Paulo Lemann, can donate up to ten percent of his previous year’s income to campaigns—granted, that’s still a lot of money, but at least it’s regulated. Rather than relying on wealthy individual donors, many countries across the Western Hemisphere fund their elections with public money—over half of all Latin American democracies, in fact. And while most allow some corporate financing of campaigns, they impose more stringent limits than in the United States. Colombia forbids corporate money in presidential races. Costa Rica, Ecuador, and Paraguay have banned all corporate donations to political campaigns, due in part to worries about their power to skew the political process. Many of these electoral systems try to diminish the role of money altogether by instituting spending caps. Mexico, for one, has taken this to the extreme. For its federal deputy races, the rules limit campaign spending to roughly $85,000, or $1,400 a day. The National Electoral Institute also controls the airwaves, buying and then allocating advertising slots to candidates and parties. This brings us to Brazil, which, until recently, proved the exception to its neighbors’ rules. Brazilian companies, if they chose, could donate up to two percent of gross revenues to campaigns (equivalent to nearly $1 billion a piece for its biggest players). Construction conglomerate Odebrecht, meat processing company JBS, bank Santander Brasil, sugar and ethanol producer Copersucar, and a handful of other multibillion-dollar corporations accounted for more than ninety percent of all spending in last year’s presidential elections and some $580 million across all elections in 2014. The pay-for-play nature of these direct contributions was most visible during the 2012 election, when the construction company Andrade Gutierrez increased its political contributions by 500 times over the last election, just as federal and state governments were awarding contracts for the World Cup soccer stadiums. (Andrade Gutierrez would win one-quarter of the bids, including one for a $900 million stadium in Brasilia.) The still-unfolding Operation Carwash scandal upended this status quo. Not content with their legal campaign finance channels, major companies in Brazil overcharged state-backed energy company Petrobras for construction and service work, and then shared some $2 billion in spoils with Brazil’s political parties (as well as Petrobras executives). In the scandal’s wake, the treasurer of the governing Workers’ Party landed in jail. The lower house speaker of the National Congress and Brazilian Democratic Movement Party leader has been indicted, and dozens of other prominent politicians and party leaders are under investigation for graft. The recent Brazilian Supreme Court ruling addressed the resulting citizen outrage. Having taken on corporate malfeasance and meddling, the country now needs to rebuild its democratic political process. The United States, too, may face a similar conundrum, with corporate donations successfully dominating pay-to-play politics. What the United States and Latin America do share is a worrisome lack of transparency in campaign money flows, making it hard to know who is influencing the rules, regulations, and policy decisions affecting citizens’ daily lives. In the United States, this results from laws and court decisions shielding big donors from public scrutiny. Organizations with innocuous names like Right to Rise funnel hundreds of millions of dollars in “dark money” to causes and candidates. In most of Latin America, the lack of transparency stems not from the rules themselves but from their weak enforcement. Hundreds of millions of dollars, if not billions, flow illegally into electoral campaigns throughout the region. The public rarely gains a glimpse of these payouts. But when it does, the foul play is shocking: authorities stopping a plane full of pesos in Mexico or suitcases stuffed with Venezuelan cash ending up in Argentina. These campaign finance shenanigans breed broader systemic political corruption, as witnessed in the scandals unfolding in Brazil, Mexico, Chile, and Guatemala. All democracies struggle with the deep ties between campaign finance and corruption. In Brazil, the payoff from corporate campaign contributions has been surprisingly direct: one study estimated a fourteen-fold return on contributions to a winning candidate in the form of awarded public works projects. In the United States, the connections are usually more opaque, walking the fine line between constituency service and political corruption. And the estimated returns on investment for campaign contributions are much lower, with direct lobbying by far the most economically effective way for corporations intent on influencing policy. The challenges differ: The United States needs better rules, while Latin America needs better enforcement. All the nations across the Western Hemisphere need to improve electoral transparency—essential for democracy—enabling citizens and voters to know who gives what to whom, thereby allowing them to use their gray matter to figure out why.

2015 is shaping up to be the anti-corruption year for Latin America. After resigning last week in the face of a growing corruption scandal, Guatemalan President Pérez Molina now faces trial and potentially jail. Investigations into government corruption have disrupted politics as usual in Brazil, Chile, and Mexico, while scandals continue to unfold in Argentina and Panama. The Dickens quote "it was the best of times, it was the worst of times” is perhaps too dramatic, but differences in how the cases are playing out across the region are quite striking. In Brazil and Guatemala, wide-ranging investigations have led to prosecutions and convictions of many of the nations’ most connected political and economic elites. In contrast, in Mexico, President Peña Nieto, the first lady, and the finance minister were recently cleared of conflict of interest allegations, and in Chile, President Bachelet’s son, Sebastián Dávalos, has so far evaded criminal charges in an influence-peddling scheme. The divergent outcomes are due in part to the differing nature of the alleged crimes. In Brazil and Guatemala, officials are charged with embezzling public funds. Through the use of wiretaps, email monitoring, and financial forensics, Brazilian prosecutors traced the flows of hundreds of millions of dollars that private companies overcharged the state-led energy company Petrobras for construction and service work, and then distributed among themselves and into political party coffers. And the Guatemalan president and the vice president are accused of running a customs fraud operation, pocketing tens of millions of dollars in import duties. The Chilean and Mexican cases on the other hand are about profiting from political access. In Chile, Caval, a company half-owned by Bachelet’s daughter-in-law, received a $10 million loan from Andronico Luksic through his Bank of Chile the day after Bachelet was reelected president. Her daughter-in-law and son then used the money to flip real estate, using insider information to buy land that was expected to quickly soar in value when the local government reclassified it for commercial development—reaping $5 million in profit. In Mexico, the president, first lady, and finance minister purchased homes from Grupo Higa, a construction conglomerate awarded hundreds of millions of dollars in public works contracts. The alleged links in both cases between favorable financial terms and political favors—and wrongdoing—are more difficult to prove than the embezzlement schemes. The divergent outcomes also reflect the importance of independent and tenacious prosecutors. Brazilian attorney general Rodrigo Janot and his team have gone after dozens of high profile suspects, including Eduardo Cunha, head of Brazil’s lower house of Congress; construction magnate Marcelo Odebrecht; and former President Lula da Silva, despite pushback from many economic and political leaders (President Rousseff has repeatedly supported the investigations). The enterprising Guatemalan attorney general Thelma Aldana has found a sophisticated and willing partner in the UN-backed and independent International Commission against Impunity in Guatemala (CICIG), using its ten years of experience building corruption cases to take on the nation’s highest ranking officials. This hasn’t been the case with Chile’s and Mexico’s more halting and limited prosecutorial investigations. In Chile, prosecutors have been slow in advancing the case against the Bachelet family, hindered by Dávalos ordering his computer erased before leaving the presidential offices at La Moneda. No whistleblowers have come forward; his former coworkers maintain their silence. In Mexico, the federal comptroller, an office created by and reporting to the president, led the investigation and limited its scope from the beginning. The comptroller cleared the president, the first lady, and the finance minister after determining that the property transactions pre-dated the administration and contract terms weren’t changed once they took office. In finance minister Videgaray’s case, the comptroller further decided that the intent to purchase (which occurred before he assumed his current office) mattered more than the signing and notarizing of documents. The investigation revealed the actual closing occurred months later and the cashing of the check didn’t happen until a few days before the Wall Street Journal broke the story. As Latin American nations work to break out of the middle-income trap, and struggle to grow in the face of global economic headwinds, the ability to take on corruption will increasingly matter. Corruption favors connections over quality, stifles entrepreneurship, and scares away foreign direct investment. This seems to be a lesson two of Latin America’s most open economies have yet to learn.

In yesterday’s presidential primaries Daniel Scioli unsurprisingly won the Peronist Frente para la Victoria (FPV) party primary, backed by Cristina Kirchner, with 38 percent of the total vote. The Cambiemos coalition, dominated by the PRO party, nominated current Buenos Aires mayor Mauricio Macri (30 percent). And Sergio Massa became the candidate for the UNA coalition, comprised of dissident Peronists (21 percent). On September 20, the three will begin their official campaigns for the October 25 presidential election (with a potential runoff on November 22). The results reflect a long holding Argentine maxim: when united the Peronists are impossible to beat. This reality is the main reason why Scioli, who has never had an easy relationship with Kirchner, acquiesced to her close ally Carlos Zannini as his running mate. In return, she forced challenger Florencio Randazzo to bow out of the primary race. Through this electoral alliance Kirchner hopes to maintain her influence and power. Yet history shows how difficult this will be—her predecessors all failed. Upon entering the Casa Rosada, Scioli will inherit a vast patronage network of millions of jobs and benefits built up during the Kirchner years and benefit himself from strong public support for these programs. "The Scion and the Heir," The Economist, August 1, 2015. And once out of office Kirchner’s political immunity ends. Numerous potential lawsuits await. In Nevada, a judge has ordered a deeper investigation into Mossack Fonseca, a Panamanian law firm accused of helping Kirchner’s friend Lázaro Báez embezzle and launder Argentine public funds. In Buenos Aires, Hotesur, a hotel management firm owned by Kirchner and her family, is under investigation for billing irregularities (also involving Báez). Zannini won’t be able to do much to help her as the vice presidency in Argentina, while symbolically important, is not institutionally powerful. Scioli may find it useful to keep Kirchner close for a time, calling on her to rally diehard loyalists for changes he wants to make. But he will have the power to dismiss her when her usefulness ends, leaving her to join Carlos Menem and Eduardo Duhalde as former Peronist presidents turned political outcasts. An unemotional politician, whatever Scioli decides will be very strategic.  

My colleagues Benn Steil and Dinah Walker recently published a great interactive on the spread of central bank currency swaps since the financial crisis. They find the United States provided developing nations with significant support through swap lines at the height of the financial crisis, but that China has been the most active extender of swap lines since 2009. China now has thirty-one swap agreements outstanding. The interactive also tells an interesting Latin America story. Argentina is one of the only countries in the world to take China up on its offer. Last year Argentina activated the swap line, and has since drawn a reported $2.7 billion of an available $11 billion. Under the agreed terms, the RMB may be freely converted into dollars. This is significant for Argentina, whose dollar reserves have plummeted from $53 billion in 2011 to $31 billion today. As such, the swap lines are being used less to settle Chinese goods trade than as a palliative for those unable to rely on the U.S. Federal Reserve, or in Argentina’s case most of the international banking system. International Monetary Fund, "Argentina: International Reserves/Foreign Currency Liquidity," 2015. China also maintains swap agreements with Brazil and Suriname, and just this week signed an agreement with Chile. Notably not on this list is Venezuela, which has already received $56 billion in loans since 2007. Even the Chinese seem to have their limits. Here is a link for more of Steil and Walker’s analyses on the topic.

The region will hold just two presidential elections this year, choosing new leaders in Guatemala and Argentina. More prevalent will be congressional and local elections. Midterms in Mexico, Venezuela, and Colombia in particular may prove bellwethers for the direction of these three important regional economies. With term limits barring Otto Pérez Molina from running again, Guatemalans will head to the polls in September. The current front-runner is Manuel Baldizón of the Libertad Democrática Renovada (LIDER), returning to the electoral ring to try and avenge his second round defeat by Pérez Molina in 2011. The president’s Partido Patriota (PP) has thrown its support behind former Minister of Communications, Infrastructure, and Housing Alejandro Sinibaldi. Sandra Torres of the Unidad Nacional de la Esperanza (UNE), who divorced former President Álvaro Colom to be constitutionally eligible to run for office, also has significant name recognition and possibilities. Early polls suggest that none of the candidates has the 50 percent needed to avoid a second round. More closely watched, at least from the global financial world hoping to resolve the current debt impasse, will be Argentina’s October presidential elections. President Cristina Kirchner has yet to throw her weight behind any of the precandidates, though most expect her to (grudgingly) endorse Daniel Scioli, current governor of the province of Buenos Aires, who comes from her Frente Peronista para la Victoria (FPV) and is the front-runner in most polls. Other favorites include Sergio Massa, a Kirchner defector and current federal legislator attracting dissident peronist and opposition support behind his candidacy and party, the Frente Renovador. Mauricio Macri represents the one non-peronist in the leading bunch, leveraging his track record as a well-known businessman, former president of the storied Boca Juniors soccer team, and now mayor of Buenos Aires. To win in the first round Scioli would need to convince 45 percent of voters to stick with the FPV (or 40 percent and a 10 percent advantage over the second-place finisher), otherwise he will face a November run-off. Among midterm elections, Mexico’s president Enrique Peña Nieto and his Partido Revolucionario Institucional (PRI) may face significant challenges come July, when the entire lower house, nine governorships, and control of Mexico City’s delegations are up for grabs. The lack of immediate benefits from the recent spate of economic reforms combined with an evolving and deepening political crisis due to several instances of state associated violence and corruption make the PRI vulnerable. The question is whether the fractured PAN and PRD opposition can overcome their own problems to take advantage of their governing rival’s weakness. Colombia will hold regional elections in October that, among other positions, will determine the next mayor of Bogotá—the second most powerful elected office in the country. With well-known leftist Gustavo Petro stepping down, candidates from across the political spectrum have jumped into the race. In polls, the leftist Polo Democrático Alternativo (PDA) leads with Clara López. President Santos’ coalition, the Unidad Nacional, will likely endorse Rafael Pardo of Partido Liberal Colombiano (PLC), while former president Álvaro Uribe is already pushing Francisco Santos of the Centro Democrático (CD). Finally, Venezuelans are scheduled to head to the polls in December to renew all 165 members of its National Assembly. In the face of falling public support—with just 25 percent approving of Maduro’s performance—rising inflation, food and basic good shortages, the government has responded with increasingly authoritarian measures. Opposition leader Leopoldo Lopez has been in pre-trial detention since February and Maria Corina Machado has been recently charged with conspiring to assassinate President Maduro (along with the U.S. Ambassador to Colombia, Kevin Whitaker). Assuming the elections occur as planned, the opposition will have to overcome its own deep historic divisions to do well—a challenge for newly elected executive-secretary of the opposition coalition Democratic Unity (MUD) Jesús Torrealba. If they do, and the Partido Socialisto Unido de Venezuela (PSUV) loses its legislative majority, the stage will be set for the potential recall of Maduro in 2016.  

Two days ago, Argentina failed to come to an agreement with its holdout creditors and defaulted for the second time in thirteen years. In this piece for Foreign Policy, I explain why this outcome is not so surprising. You can read the beginning of the piece below:  On July 30, Argentina defaulted on its outstanding debt. The technical default ends a long saga. It began in 2001 when the country failed to continue payments on nearly one hundred billion dollars worth of obligations, continued through its 2005 and 2010 restructurings of over 90 percent of these bonds, bled into ongoing lawsuits with "holdout creditors" including Elliott Management and Aurelius Capital Management, and culminated in the June 16 decision by the U.S. Supreme Court to not hear Argentina’s appeal of a 2012 ruling by New York Judge Thomas P. Griesa. This left in place a decision that not only bolstered the holdouts’ rights to repayment, but also blocked Argentina and its U.S.-based banks from disbursing the next $539 million round of interest due on the restructured debt. Negotiations over the last month ended fruitlessly, leading to Wednesday’s selective default, as defined by Standard & Poor’s. Many are bewildered as to why Argentina wouldn’t come to some agreement in the eleventh hour, given the seemingly manageable amounts of debt in play. But the truth is that Argentina acted sensibly, especially given the limited maneuvering room it had to work with. You can read the rest of the piece here on ForeignPolicy.com.

In 2013, foreign direct investment (FDI) in Latin America reached $185 billion according to the latest ECLAC report, continuing the slight upward trend of the last three years. Brazil maintained its number one position as the largest FDI destination, raking in $64 billion (over one third of all regional FDI). Mexico came in second, with some $38 billion (boosted by the $13 billion purchase of the rest of Modelo by Belgian based Anheuser-Busch InBev, a company run by Brazilians). Mexico’s Pacific Alliance partners—Chile, Colombia, Peru—also had a fruitful year, with a combined $47 billion in investment. And despite its economic woes, Argentina garnered $9 billion. Regionally, more than 38 percent of the total flow went to the service sector—including finance, telecommunications, and electricity. Manufacturing ranked a close second with over a third of the inflows, and the remainder going to natural resource production (26 percent). These flows varied by country. For example, 70 percent of FDI in Mexico went into manufacturing, while in South America, excluding Brazil, most of the flows targeted natural resources. For those hoping FDI will drive employment, productivity, and improve well-being more generally, the “quality” of FDI matters as much as the quantity. Investments in natural resources have fewer economy wide benefits when compared to those in manufacturing, technology, or some services. For instance, a 2012 study by ECLAC estimates that construction, commerce, and certain types of manufacturing create some seven jobs on average for every US$1 million invested, while mining and petroleum FDI generate just one job for every US$2 million invested. On this front, the news is somewhat positive. Within the manufacturing sector, FDI for medium level technology projects grew–comprising roughly 84 percent of total investment (flows into low-tech areas shrunk, while those into high-tech remained relatively flat). ECLAC also measured the accumulated foreign direct investment. Here Latin America fares well vis-à-vis other emerging markets, with its 32 percent of GDP average besting Russia (25 percent), India (12 percent), and China (10 percent). Chile tops this list, with its FDI stock totaling 77 percent of GDP. This deep foreign investment base also means that outward flows of profits are significant. In 2013 they averaged 81 percent of the value of FDI inflows–meaning transnational corporations with operations in the region have gotten back almost as much in profits as they invested. Perhaps one of the most striking trends in Latin America in recent years has been the amount of investment among neighbors. In 2013, Ecuador’s largest outside investments came from Uruguay, while El Salvador’s emanated in Panama. Mexico was among the top four countries investing in Brazil, Costa Rica, Ecuador, Honduras, Nicaragua, and Paraguay. While the majority of Latin America’s FDI still comes from the United States and Europe, of the top twenty mergers or acquisitions in the region, seven of the buyers were from Latin American countries. ECLAC, "Foreign Direct Investment in Latin America and the Caribbean," 2013. This trend reflects the growing influence and power of Latin American countries upon their neighbors’ economies. Historically, analysts have looked to the United States, Europe, and more recently China for needed funds in Latin America, in part due to lackluster domestic savings rates near 18 percent (versus 52 percent in China). But as these trends show, it is increasingly Latin American nations that may shape the direction of jobs and ultimately growth in the region.