Brazil

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.

CFR’s Civil Society, Markets, and Democracy (CSMD) Program highlights noteworthy events and articles each Friday in “This Week in Markets and Democracy.” Petrobras Probe Widens The Petrobras corruption probe expanded last week with the arrests of Delcídio do Amaral, the first sitting senator to be detained, and banking magnate André Esteves. Both face allegations of attempting to bribe a high-ranking Petrobras official into silence. The two are now in jail under ‘preventative arrest,’ which authorities say will avoid interference in ongoing investigations. In this limbo they join Marcelo Odebrecht, former head of Brazil’s biggest construction company, who has spent the last five months in prison awaiting charges. While the depth and breadth of the corruption probe is an important sign of Brazil’s strengthening rule of law, defendants’ right to a speedy trial also matters. Flawed Elections in Egypt & Venezuela Egypt’s recent and Venezuela’s upcoming parliamentary elections show both countries drifting further away from democracy. In Egypt, the Free Egyptians party, loyal to military President Abdel Fattah el-Sisi, won a majority of seats. Voter turnout was under 30 percent, after Sisi’s government pressured other parties to withdraw and banned its main opposition, the Muslim Brotherhood, outright. Sisi’s claims of democratic progress contradict a recent spike in flagrant human right abuses, arrests, and press intimidation. Venezuela’s democratic prospects too look grim. In the lead up to December 6 legislative elections, the government gerrymandered voting districts, jailed opposition protesters, falsified charges against opposition leader Leopoldo Lopez, and stands accused of carrying out high-level assassination attempts. Questions remain as to whether the government will recognize bad news at the polls, or acquiesce to an opposition-led congress. Political Turmoil in Haiti The official results of Haiti’s October presidential election put government-backed candidate Jovenel Moïse in the lead, to face Jude Célestin in a December 27 runoff. The announcement sparked more violent protests, followed by opposition and religious leaders’ calls for an independent commission to investigate alleged electoral fraud. With international observers largely validating the October vote, Haiti’s Provisional Electoral Council (CEP) rejected appeals. An ensuing standoff threatens political stability in the Western Hemisphere’s poorest country, with leading opposition calling for deep reforms and even a transitional government. The potential crisis hits as Haiti faces a re-surging cholera epidemic that has already killed over 9,000 people and sickened 750,000.

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.

This is a guest post by Aubrey Hruby and Jake Bright. They are the authors of The Next Africa: An Emerging Continent Becomes a Global Powerhouse. Sub-Saharan African governments are tapping global capital markets at a rapid pace, issuing $18.1bn in dollar denominated eurobonds from 2013-2015, nearly triple the $7.3bn issued in the previous three years. While government bond markets rarely capture the allure of stocks, each year international investors purchase trillions of dollars in sovereign securities around the world. Whether U.S. Treasuries or Chinese 10-year bonds, these fixed-income instruments generally provide more stable (though typically lower) returns than stocks, while offering nations financing for services and infrastructure. Sovereign bonds also bring greater accountability to governments through national credit ratings and variable yields, both of which go up or down based on good or bad economic policies. Historically, with the exception of South Africa, Africa has largely been a non-factor in sovereign bond markets. Few countries in sub-Saharan Africa even had sovereign credit ratings (a basic requisite for issuing national bonds) deep into the 2000s, reflecting the region’s past as one of the global economy’s most financially disconnected areas. Africa’s recent boom in global bond issuances, many maiden, is changing this picture. Today, many national issuers are getting first time credit ratings from Moody’s and S&P, as they’ve become more accountable and transparent. African governments are also benefiting by inclusion in standard indicators, such as J.P. Morgan’s Emerging Market Bond Index Global (EMBIG). Many Americans are already holding African bonds in their investment accounts. Institutional investors such as PIMCO and Fidelity have been increasingly buying them, attracted to higher yields, improved sovereign risk profiles, and a new regional asset class to diversify portfolios. Connecting to global bond markets has given African governments, who are scrambling to deliver infrastructure, a source of financing other than private loans or foreign aid. Nigeria is funding greater electricity output with its recent $1.5 billion issuances. Zambia plans to spend on improved health care and railways. Ethiopia is using eurobond proceeds to finance a 6000 watt hydroelectric dam and industrial parks toward its goal of becoming an African manufacturing hub. Inevitably, sub-Saharan Africa’s entry into global bond markets has its critics. Given the previous fiscal woes of African governments, it’s no surprise that some business journalists and economists have sounded alarms regarding SSA’s recent sovereign borrowing. They point to the possibility of a new African debt crisis or warn that bonds impose less conditionality and monitoring on governments than MDB financing. There are certainly always risks to sovereign debt markets (see Argentina). But the critics of Africa’s new global bonds have yet to suggest better ways for governments to pay for crucial infrastructure. To graduate from “frontier” to “emerging” market status sub-Saharan African nations need sovereign bonds, just as China or Brazil did. When African governments meet the same criteria as other countries to receive national credit ratings, list on benchmark indexes, and pass the scrutiny of the world’s leading investment funds, why shouldn’t they finance their development through international bonds? If certain governments, through poor fiscal and economic management, bring on the scrutiny of ratings agencies and investors, that reflects a greater degree of financial accountability. Sovereign credit ratings and variable bond yields provide instant and economically tangible feedback. Investors and Africa’s citizens will be watching keenly how these new bond funds are spent compared to original commitments. Too much corruption or bad economic policy will cause investors to dump certain bonds and drive up borrowing costs. The Nigerian government realized this during its 2014 central bank whistleblower scandal. When globally respected central bank governor Lamido Sanusi raised the issue of $20bn in missing state oil revenue to Nigeria’s parliament he was fired by then president, Goodluck Jonathan. The move sparked widening spreads on Nigeria’s new bonds, a drop in its stock market and currency, and a Standard & Poor’s sovereign credit downgrade. As sub-Saharan African governments further normalize their economies to global capital markets, investors can certainly expect more sovereign bond issuances. Americans will also be more likely to see African country names in the fixed income allocations of their 401k’s.

This is a guest post by Luis Ferreira Alvarez, an analyst with Stratas Advisors’ Global Biofuels Assessment and Global Alternative Fuels divisions covering Latin America.  As Brazil’s Petrobras corruption investigation continues to roil its economy and politics, the ethanol sector is emerging as a clear beneficiary. New government policies are boosting ethanol sales, chipping away at gasoline’s market share. Brazil’s ethanol comes from sugarcane. Each year producers look to market prices and expectations to decide where to direct their crops. When sugar prices fall, ethanol production increases (and vice versa). Producers must also bet on what type of ethanol will bring higher returns: anhydrous or hydrous. Anhydrous ethanol production is more costly, but demand is guaranteed by Brazil’s laws requiring it be blended into gasoline at the pumps. Hydrous ethanol is a neat fuel that’s cheaper to produce, but competes directly with gasoline. It also has a lower energy content, translating into fewer miles per gallon and meaning that prices must stay below 70 percent of gasoline prices to make it competitive.  The vast majority of Brazilian cars are flex fuel, capable of running on blended gasoline or hydrous ethanol. In 2014, Brazil produced 7 billion gallons of ethanol, making it the world’s second largest producer after the United States. Nearly all went to transportation, with anhydrous and hydrous ethanol accounting for nearly 50 percent of all vehicle fuel consumption (Figure 1). Figure 1: Gasoline and Ethanol Market Shares in 2015F  Stratas Advisors, "Global Biofuels Outlook," 2015. The last several years have not been easy for ethanol producers. The federal government reduced credit lines provided through the Brazilian Development Bank. Droughts hit harvests in the Center-South region, where some 90 percent of sugarcane is grown. Debt burdened companies, as many had taken out loans during former President Lula da Silva’s quest to make Brazil the “green Saudi Arabia.” And falling global sugar prices hurt an industry still recovering from the 2008 financial crisis. Government policies also undermined the ethanol sector. In its bid to control inflation, the government capped gas prices and removed the infrastructure tax (CIDE) on gasoline, making hydrous ethanol uncompetitive at the pump. Consumers quickly switched fuels, leading to a 10 percent decline in 2012 (Figure 2). As a result, many producers invested in anhydrous ethanol or switched back to sugar. Some forty other ethanol plants folded. Figure 2: Gasoline C and Hydrous Ethanol Prices in Brazil Stratas Advisors, ANP, August 2015. In the wake of the Petrobras scandal, the government implemented three major policy shifts to improve its finances and those of the state oil company. First, it increased the required ethanol share in gasoline from 25 percent to 27 percent. Second, Petrobras raised gasoline prices in late 2014. Finally, the government re-introduced the CIDE tax on gasoline in early 2015. Figure 3: Market Share of Pure Gasoline and Total Ethanol in Brazil Stratas Advisors, ANP, September 2015. Note: 2015 data is for January to July. These policy shifts, combined with rain in Brazil’s sugar-producing Center-South region, revitalized the ethanol sector. Producers shifted nearly 60 percent of their sugar harvest to ethanol, and sales rose 28 percent between July 2014 and July 2015 (Figure 3). Although challenges remain—producers are heavily indebted, global sugar prices are low, and gasoline price controls are still in place—ethanol may be among Brazil’s few stable sectors in the coming months.

Mailyn Fidler is a Marshall Scholar studying international relations at the University of Oxford. You can follow her on Twitter @mailynfidler. This September, African civil society, business, and government leaders gathered at the African Union headquarters in Addis Ababa to debate Internet issues at the African Internet Governance Forum. I attended the Forum to interview participants for research I am conducting on the African Union Convention on Cybersecurity and Data Protection. In the months before the global Internet Governance Forum (IGF) held this year in Brazil, most world regions host their own version of the forum to incubate positions to take at the global IGF. The IGF system was a compromise outcome of the UN-backed World Summit on the Information Society (WSIS) in 2005, which sought to address inequalities in Internet infrastructure and governance between countries. Although important Internet-related issues are addressed at the forums, they have no binding decision-making power. The ten-year review of the outcomes of WSIS will happen this December, and the agenda of the African IGF largely mirrored issues that will also be addressed then, including Internet governance, Internet access, cybersecurity, and human rights online. The report from the African IGF is available here. The 2015 African IGF was marked by excitement about increased participation by high-level African government officials. In the past, only Nigerian and host country officials had attended. This year’s event in Addis saw high-level officials from South Africa, Egypt, and Nigeria participate. Speakers noted this phenomenon repeatedly, excited by a sense that governments were taking the gathering, which held its first meeting in 2012, seriously and not writing it off as a civil society echo chamber. Despite their participation, the government representatives were not entirely supportive of the IGF’s guiding concept. IGFs are committed to multistakeholder ideals, giving equal voice to government, civil society, and business. The representatives expressed concern about this approach, stating the need to prioritize government views. Specifically, one representative raised concerns about a draft document prepared for the ten-year review of WSIS outcomes that endorsed multistakeholder principles. At the panel titled “Enhancing Multi-Stakeholder Cooperation,” a representative from the African Union repeated these concerns, drawing the biggest applause of the forum, trumping the clapping for a young Nigerian woman who challenged an Ethiopian bureaucrat over the questionable detention of bloggers and journalists. These reservations about multistakeholderism reflect the positions African states have taken on Internet governance in other forums. In perhaps the most prominent example, all but three African state attendees at the 2012 World Conference on International Telecommunications (WCIT) voted in favor of a proposal for updated International Telecommunications Regulations (ITRs) that would support a more government-centric Internet governance approach. Another hotly debated issue at the forum was the interplay between zero-rating and net neutrality. The prime zero-rating example is Facebook’s Internet.org, where the social media company works with providers to offer Facebook and select other websites at no cost to users. Attendees debated whether zero-rating was an appropriate approach to expanding Internet access in Africa. Human rights representatives championed the development as a boon for the least well off, while attendees from the African tech sector resisted it, concerned about having to compete with free Western services. Ebele Okobi, head of public policy for Facebook Africa, sought to highlight Facebook’s recent efforts to include more and locally developed websites on its free platform. Attendees also debated whether zero-rating violated the principle of net neutrality, and if, when, and how African states should legislate to preserve net neutrality. The first event I attended at the forum opened by urging attendees to remember, “If you’re not at the table, you’re on the menu.” Concerns about making sure Africans are “at the table” resonated throughout the event. I spent coffee breaks with younger attendees, listening to their concerns that the structure and style of the event would resign the African IGF and African perspectives on these issues to obscurity. I watched civil society walk the fine line between welcoming increased government participation, which could give the forum increased seriousness, and resisting increased government influence, which could shut out crucial African voices. I watched the forum grapple with the disparity between the increased willingness and ability of African states to “be at the table” on Internet matters and the limitations the external world still places on African participation. At the same time, attendees also recognized that many African countries still must make huge strides in government, civil society, and technological capacity before having a consistent, firm, and informed seat at the table, despite incredible progress. A strong African voice on Internet matters at international events may come with decreased inclusiveness. The greater number of African government officials who attended the African IGF, gathered in the Chinese-built hall of the African Union, may well determine such a tradeoff is worth it.

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.

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.

Why has Brazil slashed deforestation over the last decade while Indonesian deforestation has accelerated? The two countries lead the world in deforestation, which, after energy use, is the top source of greenhouse gas emissions. In the last week, each country has released an emissions-cutting plan in anticipation of the Paris climate summit that relies heavily on avoiding deforestation. Figuring out why Brazil has succeeded while Indonesia has lagged can provide insight into how both countries can do more. Earlier this year I gathered a multidisciplinary group to explore the Brazilian experience and extract lessons for climate policy. Some of the highlights are summarized in a short report that we’ve just released. We looked at a wide range of issues, many of which are discussed in the report, but I was particularly intrigued by our discussion of why Brazil and Indonesia turned out so differently from each other. The most obvious reason is that Brazil had an earlier start. Its government has been focused on reducing deforestation for over a decade; the Indonesian government hasn’t started looking at the issue seriously until more recently. This is actually good news, since it’s something that time should overcome. Governance and rule of law also stood out as big factors. Both countries have fairly decentralized governance – a feature that should make controlling deforestation difficult since decisions from the center don’t always translate into action. But Indonesian governance is considerably less centralized, which puts Indonesia at a disadvantage. Similarly, since avoiding deforestation requires effectively enforcing laws, corruption is a big barrier to success. Brazil obviously has its fair share of corruption problems, but Indonesia is arguably worse. Both of these factors make avoiding deforestation more difficult in Indonesia. But there’s a bright side: neither needs to be permanent. Governance structures change over time; countries also reduce corruption and improve the rule of law. None of this is easy, of course, and it’s unlikely to happen just to facilitate avoided deforestation, but it at least offers some promise. The last factor that came out in our discussion, though, augurs much more poorly for Indonesian prospects. Amazonian timber has typically been cleared to create cropland or pastureland, or, more simply, to establish ownership of a given tract of land. The wood itself is typically mostly worthless. In contrast, in Indonesia, the trees that are cut down are usually highly valuable. That means that the economic incentive for deforestation is much stronger in Indonesia – which, in turn, means that policy needs to lean much harder against deforestation in order to succeed. This factor suggests that replicating the Brazilian experience in Indonesia will be more difficult than many would hope. The full report on the workshop dives into a bunch of other issues – including the prospects for private sector led efforts to reduce deforestation, new avenues that public policy might pursue to keep trees standing, and the possibility that the decline in Brazilian deforestation might reverse. Download it here.

The first decade of the 21st century was a good one for Latin America. A recent Pew Research Center report estimates that some 63 million individuals entered the middle class, measured as earning between ten and twenty dollars a day. Add in the 36 million more members of the upper-middle class, and 47 percent of those in South America—a near majority—are no longer poor. Mexico brought over 10 million people into its middle ranks during the decade, raising the combined share of the middle and upper classes to roughly 38 percent of the population. George Gao, "Latin America’s Middle Class Grows, but in Some Regions More Than Others," 2015. Unsurprisingly, the commodity boom helped. Demand for oil, soybeans, copper, iron ores, and numerous other raw materials boosted investment, increased exports, and created jobs. Abundant global capital and easy credit spurred public and private consumption, lifting consumption of the middle even more, and supporting expanding retail sectors and employment. Government policies, in particular conditional cash transfer programs such as Oportunidades in Mexico and Bolsa Familia in Brazil reduced inequality and poverty as well. With historically low unemployment rates and rising real wages, the middle thrived. World Bank, "World Development Indicators," 2015. World Bank, "World Development Indicators," 2015. Slowing growth since 2013 is now reversing some of these gains. With Brazil, Argentina, and Venezuela already in recession, the IMF projects regional growth of just half a percent for 2015. Falling commodity prices and higher public and consumer debt levels mean exports and consumption are down. As nations search for new growth engines, weak schools, bad infrastructure, and limited R&D investment leave them with few easy short-term options. Governments too are limited in their ability to fill the gaps, given increased debt loads and relatively weak tax collection. The report is somewhat pessimistic about the prospects for this newly emerging middle class. Many live paycheck to paycheck, and are deeply indebted. In Brazil, average household debt—mostly high interest consumer credit—now stands at 46 percent of disposable income. One study estimates that 14 percent will fall back into poverty in the coming decade. The prognosis is not all bleak. Central America, which missed the earlier uptick, could see its middle class grow. And recent data from Mexico shows poverty continuing to decline in many of its northern states (even as it rose overall). Interestingly, the positive results in many Mexican states and hopes for Central America’s middle ranks depend on U.S. trade ties. The United States remains the world’s largest consumer market, its draw heightened as China falters and the EU stagnates. And U.S.-Latin America exchanges are more likely to rely on manufactured goods and services than raw materials, another benefit as these nations work to protect and expand their middle income sectors. Whether countries are able or not to expand these ties, the coming decade will prove much harder for the region, both for those that gained and those that did not, during the boom.

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.

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.