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Latin America’s Moment analyzes economic, political, and social issues and trends throughout the Western Hemisphere.

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An illegal gold mining camp is discovered in Madre de Díos during a Peruvian military operation in 2019.
An illegal gold mining camp is discovered in Madre de Díos during a Peruvian military operation in 2019. Guadalupe Pardo/Reuters
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Illegal Gold Finances Latin America’s Dictators & Cartels. The United States Must Lead the Fight Against It.

by Will Freeman and Steven Holmes November 15, 2024

Four policy ideas to curb illegal gold mining in the Western Hemisphere.

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Brazil
Temer's Gambit
Until May 17, it seemed as though President Michel Temer could survive in the presidency until the 2018 elections, despite various pending allegations against him. These calculations have been turned on their head by news reports that meatpacking baron Joesley Batista taped Temer encouraging Batista to pay hush money to the jailed former president of the lower house, Eduardo Cunha. If news reports of the Federal Police’s investigation are to be believed, authorities have accumulated indirect but damning evidence against Temer.  The new scandal panicked Brazilian markets this week, as investors realized that the reforms they expected of Temer are now likely to fall victim to fresh political turmoil. The public is inflamed, and new protests have already begun to percolate on the streets of major cities.  So it was shocking that when Temer gave a press conference on May 18, he categorically rejected any possibility of resignation, stating “I will not resign, I repeat, I will not resign.”  It may be, of course, that Temer is innocent of the charges against him, as he claims. But the pressure against him is enormous, and cynics could be excused for seeing his press conference as a calculated gambit to clamp down on public speculation about the quickest path to his removal: resignation.  With resignation apparently off the table, Brazil is now left with four bad options that suggest the resolution to this crisis will be measured at best in weeks, but more likely, in months. I list them below from fastest to slowest: 1.    Public pressure builds, and Temer resigns out of some combination of frustration, shame, and incapacitating political paralysis. This could happen as quickly as tomorrow, but it is more likely to take weeks or months, since Temer is a scrappy political fighter who has never given up easily. 2.    The investigation moves forward, with formal charges filed by prosecutors against Temer. In that case, the Supreme Federal Tribunal (STF) could rule that Temer should be removed from office for obstruction of justice. But the STF has been timid about getting involved in political affairs and always moves slowly. At best, this is a weeks-long scenario; more likely it would be a long slog.  3.    The electoral court finally hears a pending case, filed against the Rousseff-Temer ticket for alleged campaign finance violations in the 2014 elections. The court had appeared to be kicking the can down the road to avoid confronting the sitting president, but in the face of public pressure it might decide it is worth moving forward at last. The only problem is that the Batista investigation has nothing to do with the 2014 election case, which might give rise to criticism of the electoral court’s casuistic approach to law. Even if the electoral court did move, furthermore, progress will likely take weeks, and possibly months, and there is no guarantee that Temer will lose the case.  4.    Impeachment is a fourth option, but this would take at least six months or longer, especially in light of the fact that many members of Congress know that their survival is closely linked to Temer’s.  The passage of time also factors into Temer’s gambit to rule out resignation. Brazil is only 16 months away from elections, and every day the country moves closer to the elections diminishes the incentives opponents have to remove Temer from office by exceptional means. Opponents may also think twice as they look at the backup slate of politicians who would replace him—at least temporarily—which includes scandal-tainted figures such as Chamber president Rodrigo Maia and Senate president Eunício de Oliveira. Finally, there is no clear guarantee that the indirect elections that would likely follow Temer’s removal would lead to a better successor, especially because the Congress that would select that successor is deeply rotten.  Temer is not widely associated with probity, but few people question his political savvy. Vehemently rejecting resignation was a brilliant—if selfish—move, and may yet allow the Temer presidency to limp along to its natural end.   
Blog Post by Matthew M. Taylor May 19, 2017 Latin America’s Moment
Americas
The Politics of Latin America’s Middle Income Trap
Many of Latin America’s largest economies are stuck in the so-called “middle-income trap,” with slowing productivity growth making it unlikely that they will catch up to the top global economies in the near term. Countries in the middle income trap are losing competitiveness with poor economies on manufactured exports, but are also unable to compete with wealthier economies in high-skill innovation.  As a result, they are “stuck” in the middle income category, and they have been stuck for a long time. According to the World Bank, of 101 countries that were middle-income in 1960, only 13 had graduated to high-income 48 years later. Large middle-income countries today have now been in the middle-income bracket for more than six decades, as opposed to only 42 years for the earlier industrializers. Social scientists have long recognized the problem of the middle income trap, and a general consensus exists that the only way to break out is to save and invest more, invest in education, improve infrastructure, and increase innovation, research and development (R&D). But a recent article by Richard Doner and Ben Ross Schneider points to a larger political problem that has received far too little attention: middle income countries must build strong institutions despite weak societal demand for such institutions.  Although their paper extends beyond Latin America, it will be of particular interest to scholars and practitioners interested in Latin America’s development trajectory. In Latin America’s large middle-income countries—Brazil, Mexico, Argentina, Colombia, and Peru— the middle income trap is evident in multiple ways. These Latin American countries have less than a quarter of the technical personnel in R&D by comparison with higher-income Asian or OECD countries, and their R&D spending is also less than a quarter of their richer peers. The share of the labor force that has higher education is less than 60 percent that of the wealthy countries. Latin middle-income countries’ scores on PISA educational attainment tests are over one-fifth lower than their wealthy peers. Income inequality is high, informal employment is above 50 percent on average, and the shadow economy has been growing, rather than shrinking. As a consequence of all of these factors, large Latin middle-income nations’ GDP per capita, in purchasing power parity terms, remains about 38 percent of the OECD high income countries, and 29 percent of the Asian high-income nations.  Doner and Schneider note that much of the development literature has focused in recent years on the importance of institutions. But this prescription is unsatisfying in that it tells us little about how to build the coalitions needed to create those institutions. Many of the policies required to achieve middle income status—devaluation or trade liberalization, for example—a could be implemented by insulated technocrats through a stroke of the pen, so coalition-building was seldom a central concern. The “upgrading reforms” needed to move into the higher income category, by contrast, are difficult and complex processes of institutional construction, and require coordination to monitor and reconcile the interests of multiple actors. Furthermore, those upgrading reforms oftentimes are in direct conflict with the conditions that facilitated movement to middle-income status in the first place, such as foreign investment or large pools of low-skilled labor. Using studies of R&D and education reforms, Schneider and Doner demonstrate that all too often in large middle-income nations, the incentives for key actors to support “upgrading reforms” are missing. Building the political coalitions needed to move into the higher income category requires overcoming challenges that are particularly pronounced in Latin America: inequality that makes politics more vulnerable to dysfunction, informality that generates disincentives to educational investment, and high rates of foreign investment, especially by multinational corporations that have few incentives to join coalitions investing in upgrading policies, such as education or R&D.  If Doner and Schneider’s excellent analysis can be faulted for anything, it is that they offer a devastating critique of the situation facing large middle-income countries, but few constructive policy recommendations for how to escape it. This is partly—as they acknowledge—because it is difficult to know what will work, given that the countries that escaped the middle income trap during the twentieth century did so under unique conditions. Those countries were either East Asian nations with strong developmental states, late entrants into the EU, or small countries. External security threats, contentious politics, and few exportable natural resources were conditions that helped some of these countries to build developmental coalitions; most important was that elites did not get in the way by capturing institutions and policy for their own purposes. It will be hard to recreate many of those conditions on the ground in Latin America’s large middle-income countries today. But Doner and Schneider’s diagnosis provides us with a better sense of where the problem lies: the lack of incentives that might galvanize reform coalitions to move in the right direction. Researchers and policymakers may be able to build on this crucial insight to think about how best to develop long-term strategies that would encourage pragmatic policies, good institutions, and the coalition-building needed to support both. Postscript: In a happy coincidence for readers in Washington, DC, I have just learned that the authors will be presenting their work at the Inter-American Development Bank on June 2, from 12:00 p.m. to 2:00 p.m. 
Blog Post by Matthew M. Taylor May 16, 2017 Latin America’s Moment
Mexico
Why U.S. Tax Reform Threatens Mexico's Financial Future
While tweets and speeches may continue to cause consternation in Mexico and Canada, the existential threat to NAFTA seems to have passed. President Donald Trump is now talking about giving “renegotiation a good, strong shot” rather than rescinding the free trade agreement entirely. On the docket will be intellectual property, labor rights, e-commerce, rules of origin and the environment – issues Canada and Mexico are happy to upgrade, the outlines already defined within the ill-fated Trans-Pacific Partnership. More contentious issues could include “Buy American” clauses, border customs processes, sanitary measures, and import licenses, as well as specific grievances around the Canadian dairy and soft lumber industries, and regarding Mexican sugar imports. The process will undoubtedly be drawn out; the negotiations won’t begin in earnest until three months after the White House informs a still-waiting Congress. But for Mexico, there is another huge challenge to its economic future: U.S. tax reform. The most obvious and widely noticed threat is a border adjustment tax (BAT). As laid out in Speaker Paul Ryan’s tax reform “blueprint,” it would charge a 20 percent levy on all goods and services brought into the United States, and exempt U.S.-made exports from being taxed at all. Its proponents claim the dollar would appreciate the 25 percent necessary to call it an economic wash; others believe Mexico and other exporting nations would suffer. This pseudo-value added tax (VAT) is looking less and less likely, as it is opposed by Wal-Mart, Target and nearly every other major retailer, as well as by oil companies, car makers and others that depend on products from elsewhere to run their factories and businesses here. Even if it passes, it will face legal challenges in the World Trade Organization (WTO) for its non-VAT qualities, in particular allowing companies to deduct wages when calculating their BAT tax burden. A corporate tax cut is more likely to succeed, and could be as damaging for Mexico. Republicans across the board have long favored a reduction, and with the U.S.' current 35 percent tax rate ranking highest among OECD nations, they have an argument for it. Ryan talks of lowering the corporate rate to 20 percent, bringing the United States in line with the United Kingdom and Luxemburg. Trump’s more drastic 15 percent proposal would put the United States in the bottom 20 percent of chargers, beating out Germany and closing in on the “corporate tax haven” of Ireland. If the U.S. rate plummets, Mexico will be forced to follow suit. View full text of article, originally published in Americas Quarterly.
Blog Post by Shannon K. O'Neil May 15, 2017 Latin America’s Moment
  • Chile
    Making Chile Great Again
    In my piece published this week on Foreignaffairs.com, I reflect on the end to Chile’s exceptionalism and why, after three decades of democratic growth, protests now envelop the country. I argue that Chile’s next president will have to find a more inclusive economic model, based on more than copper, if it wants to return to stable and prosperous growth, and reassume the exceptional mantle, in the future. You can read the first three paragraphs of the article below: Since its return to democracy in 1990, Chile has been heralded as Latin America’s exception. It has avoided the economic crises, populist governments, deep-seated corruption, and bitter social conflicts that have plagued other countries in the region. Instead, over the last 30 years Chile has boasted sound macroeconomic management; placid, stable, and almost boring politics; and generally restrained and strait-laced social manners. Such steadfastness has served the nation well. Once one of the poorest countries in Latin America, in 2012 Chile moved into the World Bank’s high-income bracket, making it one of only two nations in the region to break out of the so-called middle-income trap. Today Chile outranks its Latin American peers on measures of competitiveness as well as on human development indicators such as infant mortality and life expectancy. These successes, based on years of consistent and often rapid economic growth, have made Chile into a model for Latin American success. Yet over the last half decade, this tranquillity has come to an end, and the economic and social consensus of the postauthoritarian years has crumbled. In the capital, Santiago, it is now common for hundreds of thousands of protesters to fill government plazas and block the city’s main avenues. Miners, longshoremen, air traffic controllers, students, and public employees repeatedly shut down operations, leave classrooms, and walk off the job. And Chile’s prosecutors and courts have upended its previously clean image by uncovering collusion and corruption among the economic and political elite. View full text of article, originally published in Foreign Affairs.
    Blog Post by Shannon K. O'Neil May 12, 2017 Latin America’s Moment
  • Brazil
    Will 2018 Bring a Mandate for Change in Brazil?
    It has been a tough month in Brasilia. The release of the list of 98 senior politicians implicated in the Lava Jato investigation confirmed that corruption runs broad and deep across the political landscape: 17 parties and 63 sitting legislators are mentioned, and President Michel Temer’s cabinet and the congressional leadership are chock-a-block with alleged wrongdoers. Temer himself has emerged in the revelations, and his only saving grace is that his poll numbers cannot fall much further: separate April polls by Vox Populi and Datafolha showed his popularity in single digits. Strikes against Temer’s reforms took place in over 100 cities nationwide last week. The president is facing a challenge in the Supreme Court, where the left-leaning PSOL has questioned the temporary immunity that he enjoys as head of state, as well as in the electoral court, where the 2014 Rousseff-Temer ticket’s campaign finances will be scrutinized later this month. The public overwhelmingly would like to see him replaced. But Temer seems unlikely to be going anywhere. The court cases against him will likely be kicked down the road by judges who see little to gain from adding uncertainty to an already fraught political landscape. Congress—which would be needed to engineer any political effort to replace Temer—remains largely supportive, in part because few other senior leaders have been left standing, and few politicians are eager to replace Temer as national punching bag.  The pressure to remove Temer diminishes with every day that Brazil steps closer to the 2018 elections; there is no need to remove him, after all, if soon enough voters will have their chance to vote in a successor. Temer’s survival, though, is probably a mixed blessing for would-be Brazilian reformers. His failings are exposed everyday by an active opposition, and association of reforms with Temer will likely tar the legitimacy of future reformers, even after Temer has left office. The Workers’ Party (PT), in particular, has been diligent in banging home two messages: first, that the Lava Jato investigations are politically motivated; and second, that the Temer reform project of fiscal austerity, pension reform, and labor code adjustment is part of a neoliberal “coup agenda.” The claim that Lava Jato is politically biased may help the PT to regain public support, but it also strengthens those who seek to foil anticorruption investigations: Congress has built on this sentiment to move forward a bill against so-called “abuse of authority” by prosecutors. While the bill includes some welcome controls, it is hard to avoid the conclusion that it is one more in a seemingly endless series of concerted efforts intended to prevent other Lava Jato investigations from emerging in the future. The PT, meanwhile, is determined to politicize the inquiry into former President Lula when he is deposed in Curitiba in the coming days: the party is planning a “caravan” to Curitiba and protests outside presiding Judge Moro’s chambers. The PT’s charge of differential treatment will find empirical confirmation in a sad reality of the Brazilian court system: the relative speed of trial courts like Moro’s, especially when contrasted with the glacial pace of the Supreme Court. This means that Lula’s case will likely be resolved years before the cases of sitting federal politicians from rival parties such as the Brazilian Democratic Movement Party (PMDB) and Brazilian Social Democratic Party (PSDB), whose incumbency provides them privileged standing in the glacially slow high court. A conviction in trial court, if upheld on appeal, would reinforce the discourse of partisan justice by barring Lula from competing in the 2018 election, in which he currently leads the polls. On economic reform, the PT’s approach is opportunistic but savvy. It is opportunistic, not least because both Lula and Rousseff in past years recognized the need for change, and even undertook some reforms that moved in the same direction as Temer. But it is savvy, in part because polls show that huge majorities of the population are against cutting pension benefits, permitting labor outsourcing, and freezing public expenditures. Railing against reforms and associating them with the low-legitimacy Temer presidency will buy the PT support. It helps the party return to its historical discourse of social equality and workers’ rights, galvanize supporters, and redirect public attention away from the very serious crimes committed on its watch. There are many unpredictable moving parts but, as it stands now, the first round of the 2018 election seems likely to feature a PT candidate who is the frontrunner in the polls, but is ineligible to run for office due to a corruption conviction. He or she will face a long list of other potential second-finishers: a tepidly reformist representative of the PSDB, such as São Paulo governor Geraldo Alckmin, the left-leaning Marina Silva, conservative firebrand Jair Bolsonaro, eternal candidate Ciro Gomes, or São Paulo mayor and PSDB upstart João Doria. Under these conditions, will the new president have a mandate for change? Significant progress on necessary constitutional reforms by the new president will require a strong electoral showing, support from Congress, and public backing. But a strong electoral showing may be hard to achieve in the fractured field of candidates, and even the artificial majority generated in the second round may well be fleeting—a pinch-my-nose vote between an unpalatable candidate and an only marginally more acceptable alternative. Congress is not going to be an enthusiastic backer of reforms, distracted as it will be by ongoing legal troubles, preserving its incumbent privileges, and positioning itself in a volatile environment in which voters overwhelmingly reject the established political parties. The public does not seem convinced of the need for reform, and the eager denunciation of reform by the PT and many other politicians will only make this burden heavier. Two scenarios could alter this sobering outlook. The first is that the PT wins, with either Lula or an as-yet-unidentified substitute, and governs pragmatically, in a scenario reminiscent of Lula’s first term in office when he strong-armed the party into adopting pension reform and prudent macroeconomic policies. The trouble with this scenario is that the PT is no longer an effective party of government, having been deeply wounded by the loss of so many leaders to the Lava Jato scandal, and it would have enormous difficulty reconciling with potential legislative allies, such as its erstwhile partners in Temer’s PMDB. The second scenario would involve a candidate who ran, and won, on an unabashedly pro-reform platform. At present, only two of the likely candidates might be able to galvanize reformist sentiment: João Doria as an economic reformer, and Marina Silva as a political reformer. The trouble with this scenario is that neither has yet consolidated their candidacy or perfected a message, and it is hard to envision a scenario in which either has substantial legislative coattails. Many factors could yet alter this outlook, but eighteen months out, the prospects of a reformist new president with a clear mandate for change remains a distant fantasy.
    Blog Post by Matthew M. Taylor May 12, 2017 Latin America’s Moment