Latin America’s Moment

In 2018, nearly two out of every three Latin Americans will head to the polls to elect new leaders, and the fight against corruption will be high on their agenda. The surge to throw the bums out could be a harbinger of cleaner politics. But a revival of the region’s tradition of populism could also threaten the nascent institutions and mechanisms that are Latin America’s best hope for a more honest tomorrow. Voters are rightly enraged about corruption. Nearly every country has seen its share of high-profile scandals. In Mexico, governors have allegedly stolen land, pilfered workers’ social security contributions, received public contract kickbacks, and even replaced children’s chemotherapy medicine with water to make a buck. In Honduras, tens of millions of dollars have vanished from the social security system under the president’s watch. In Brazil a third of the congress, five former presidents, eight cabinet ministers and scores of other officials are under investigation or indictment for bribery and other crimes. Even the supposedly pristine nations of Chile and Costa Rica have been drawn into the muck: President Michelle Bachelet’s son was part of a shady real estate deal and all three branches of the Central American government were rocked by a cement import scandal. The aggregate costs of corruption for the region are staggering, leeching tens of billions of dollars each year from the Brazilian and Mexican economies, 3 and 5 percent of gross domestic product respectively. In Colombia, an estimated one out of every 10 public dollars disappears — equivalent to the entire health budget. Yet corruption’s emergence as a major political talking point is largely the result of positive regional trends. Nearly all of the nations are now democracies. The shedding of authoritarian pasts has enabled the rise of a freer press, with intrepid reporters eager to uncover misdeeds. Their investigations, in turn, have benefited from new tools, including freedom of information acts that have opened up public logs to scrutiny. In some countries, hard-fought judicial reforms are also bearing fruit, empowering more professional and autonomous judges and court officials to take down wrongdoers. Bolstering these institutional changes are societal shifts. The growth of a middle class — now a full third of the region’s population — means tens of millions of citizens are no longer just focused on day-to-day survival. And they are paying taxes that they hate to have disappear.  Yet almost daily revelations of malfeasance, combined with excruciatingly slow progress in bringing the perpetrators to justice, have led to disappointment, frustration and real anger with the political establishment. As a result, today’s batch of centrist, pragmatic and market-friendly presidents all wallow in the public opinion doldrums — only Argentina’s President Mauricio Macri breaks even on approval ratings. This rising disgust has opened the door again to populist outsiders who use corruption as their new rallying cry. In Honduras, TV personality Salvador Nasralla campaigned on human rights and corruption. In Mexico, Andres Manuel Lopez Obrador hammers his opponents as a political mafia only he can dismantle. In Brazil, though the left remains behind former president Luiz Inácio Lula da Silva despite his corruption conviction, the centrist parties have collapsed under the weight of similar charges. In Colombia, the anti-establishment sentiment is so strong that vice president German Vargas Lleras has cut ties with his party to run on his own. In past decades, Latin America’s economic populists have exploited the real gaps between the region’s have and have-nots, riding these class tensions into office. Once there, they have used their power to override central bank independence, ignore congressional budget limits, and erode other checks and balances. Their profligate spending cultivated their political base even as it led to spiraling inflation, falling investment and an inevitable economic crash, hurting their supporters more than anyone. If this populist past is any guide, today’s anti-corruption crusaders could also make things worse. By trampling legal niceties as they go after those they have identified as past aggressors (usually their political opponents), they could undercut the very slow but real progress that is being made, undermining the transparency and accountability needed to stop similar behavior in their own ranks. In this respect, the recent hurried charges brought against former Argentine president Cristina Fernandez de Kirchner and her cronies are worrisome. Pragmatic, institutionally minded leaders are the only ones equipped to address the underlying reasons for voters’ justifiable anger. What Latin American nations need are incremental improvements that strengthen institutions. What they may unfortunately get is leaders with grandiose but empty promises. View article originally published on Bloomberg.

As the warm winds return, the days lengthen and the jacaranda trees explode in a riot of purple along its main avenues, Buenos Aires is also enjoying the afterglow of President Mauricio Macri and his Cambiemos coalition’s resounding October win. All the big cities and provinces went their way -- the first time a party has swept the national electoral field since Argentina's return to democracy in the 1980s. The midterm election upended two constants of Argentine politics. The first was the idea that a business-oriented party can’t compete. Macri and his coalition have now won twice, and gained national traction with time. The second is that the Peronist party, the dominant political force of 20th-century Argentina, can’t lose. Yet it collapsed. These two seismic political shifts are partly the result of savvy leadership. But they also reflect fundamental shifts in Argentina’s economy and society. For one hundred years, since Argentina introduced the secret ballot in 1912, the only way the capital class came to power was through voter fraud or military coups -- of which there were six in the subsequent years. Even the middle-class oriented opposition Radical party couldn’t hold the executive office for long -- every one of its democratically elected presidents was ushered out early, either by a military escort or a market meltdown. Cambiemos has defied this truism because so far it hasn't acted like a business party. While pro-market, it isn’t neoliberally austere. Instead, like its populist predecessors, it has supported social programs, unemployment benefits and pension payouts to lessen the blow of stagflation for the average voter. Macri and his team have gone further, spending big on infrastructure projects.  Ubiquitous yellow signs hover every few blocks next to piles of dirt, slabs of concrete, reams of steel rods and pots of paint, touting repairs to broken sidewalks, darkened street lamps and blackened buildings.  The biggest bet and electoral payoff have come from the new Metrobus, dedicated lanes on the capital’s main boulevards that snake out dozens of kilometers into wealthy and humble enclaves alike. While a similar public transportation roll-out caused havoc in Chile in 2007, tanking President Michele Bachelet's approval ratings, everyone in Buenos Aires raves about the new system, which has cut some rush-hour commutes in half. This was good government backed by good marketing. A vast staff within the Casa Rosada scoured databases and polls, targeting electoral appeals street by street, ultimately turning a sea of Peronist blue municipalities Cambiemos yellow. Yet Macri’s win also came from Peronist failures. The movement has all but disintegrated, its factions losing ground in the midterms. Part of the problem is its leadership, or lack thereof. Despite her legacy of economic malpractice and deep ties to corruption, former president Cristina Fernandez de Kirchner remains its standard bearer, the most visible and popular among the unpopular. But Peronism’s slide into irrelevance also reflects a failure to adapt to structural economic change. For decades, Peronism relied on a winning electoral alliance of urban unions and rural bosses. Its pillars began to wobble in the 1970s, as offices displaced factories and the countryside began emptying out, draining the votes that rural political machines could deliver.  In the 1990s Peronist president Carlos Menem tried to adapt, opening markets, attracting private sector investment and courting the growing middle class. The 2001 economic crisis stopped this internal political evolution even as it accelerated the underlying economic shifts. After much turmoil, the nation finally settled into more than a decade of Kirchner rule—first Nestor, then his wife Cristina – from 2003 to 2015. Together they forced out their modernizing colleagues and returned to a populist economic playbook based on protectionism, clientelism through massive social programs and a government hiring spree. These efforts bought the loyalty of the nearly million Argentines who lost their living when GDP plummeted 20 percent, but they didn’t bring back organized labor. And the high export taxes they introduced on soy, beef and other agricultural products enraged Peronism's once loyal rural base. When the economy turned -- dragged down by profligate public spending, limited investment, rampant inflation, the commodity bust and a good dose of corruption -- it left the party decimated. Macri today has enviable approval ratings. Yet the president can still easily stumble. Despite an initial big bang of reforms -- floating the currency, resolving the debt issue with international holdouts, re-creating an independent statistics agency and lowering some public subsidies -- the government has yet to make many of the hard choices necessary to put the nation on a sustainable path. Fixing potholes and creating new bus lines are all well and good; but that won't drag Argentina into the 21st century. At some point, Macri's coalition will have to put forward its plans to take on the nation’s deep-seated economic dysfunctions. This starts with the cash economy. Few places beyond tony boutiques and restaurants welcome credit cards, and purchasing big ticket items such as cars and homes still involves suitcases stuffed with bills. The “blue market” peso-dollar exchange continues. After a fruitless trip to five cash machines, I used the hotel’s favored money changer -- a woman in her thirties in a white top and jeans with meticulously folded 100 peso bills -- for walking around money.  She let me know that I’d get a better rate next time if I brought $100 Benjamins instead of my lowly $20s. All of this informality means wasted time and limited sales, and in the aggregate curtails the upside of the current economic bounce. If the economy doesn’t grow, Argentina’s patience with the president and his coalition will grow thin. More fundamentally, Argentina remains uncompetitive. A decade without foreign direct investment has left it technologically backward.  Instead of the automation occurring in other emerging economies, labor redundancies are baked into even quotidian tasks. Buying a single cortado (coffee) took no less than two transactions, three lines and five people. This is not how a future economic powerhouse functions. And the government mantra of gradual change depends on outside financing. While global liquidity and low interest rates have provided the $40 billion a year cushion that Argentina needs so far, the last non-Peronist government went down in economic flames when international funding disappeared. Argentina, like all democracies, needs an opposition. With almost a third of Argentines living in poverty, there is plenty of room for a left-leaning party. But to return to power, the Peronists can’t go back to their roots. They need new leadership and new ideas. Here, the party’s longstanding ideological flexibility can be a strength. Who knows, as Peronism searches for a winning platform, it could just be the balanced budgets, labor flexibility and economic openness that Macri's government has yet to embrace. Click here to view article originally published in Bloomberg View.