Latin America’s Moment

Prison violence has taken the lives of more than one hundred Brazilian prisoners since the beginning of the year. While the recent killings have been gruesome and especially numerous, they are a continuation of a long-standing pattern of savage prison violence that has developed its own macabre logic of control. Scarier still than the calculated horror of the past week’s violence, though, is the possibility that this prison violence may contribute to the consolidation of a particularly virulent form of criminal organization that threatens the rule of law in Brazil and its neighbors. Like many other countries in the hemisphere, Brazil responded to an upsurge of violence after the return to democracy with a get-tough policing strategy. The prison population nationwide has more than quintupled since 1990. Brazil imprisons more of its population per capita than any other country in South America (307 prisoners per 100,000 inhabitants), and has the fourth largest prison population in the world. Conditions in the prisons are abominable, with many facilities outsourced to profit-oriented contractors, who often abdicate internal control to inmates. Government investment in building new prison capacity has been a low priority: occupancy rates are officially nearly 60 percent higher than capacity, and pre-trial detainees account for more than one third of all prisoners. These abysmal conditions are fertile ground for prison gangs who exploit the vulnerable populations behind bars. The most perverse development of the past generation in Brazil, though, has been criminal organizations’ increasing recognition that dominance of prison populations also gives them enormous control over criminal activity outside prison gates. This logic works as follows: prison gangs can extort individuals on the street because they hold their friends and family hostage in jail. Further, because criminals currently on the street are likely to spend time in jail at some point in their careers (where they will be vulnerable to gang violence), they have incentives to either join those gangs or pay tribute to them. The predictable result, as David Skarbek demonstrated with reference to the Mexican Mafia prison gang in Southern California, is that prison gangs have control not only within prisons, but also – by virtue of their lock on vulnerable populations behind bars – enormous influence on the streets. Given the scale of Brazil’s prison gangs, the consequences for the rule of law are significant. In May 2006, the Primeiro Comando da Capital (PCC) – one of the prison gangs currently vying for power in Brazil’s northern states – responded to the planned transfer of some of its leaders in São Paulo state by engaging in a series of targeted attacks outside the prison system. At least 140 people were killed in the first round of attacks, and the industrial metropolis of São Paulo shut down as police and the PCC battled. The very idea that the PCC could confront the state directly is frightening. More horrific still is the fact that the PCC is now battling other prison gangs for control of prisons in the northern states of Brazil, far from its original home base in the southeast of Brazil, as well as challenging the Comando Vermelho on its home turf in Rio de Janeiro, which the PCC has traditionally treated as off-limits. The PCC has already shown that it is capable of terrific exploits when left unchecked. The gang is said to have been behind the theatrical and record-breaking 2005 heist of $70 million from the Central Bank regional headquarters in Fortaleza. It has engaged in widespread corruption of public officials. It is believed to be active across national borders, with an active presence in Paraguay and interest in developing ties along Brazil’s northwestern border to Colombia, Bolivia, and Peru. It is active not only in illicit activities, like drug trafficking, but is also believed to have moved into the licit economy. And it now appears to have broken its longstanding armistice with the Comando Vermelho, in a move that may be calculated to ensure it can control northern drug routes. The short-term implications are already clear—prison violence will probably continue to percolate until the gangs establish a new pecking order. The longer term worry is that the battle for dominance of the prisons could result in an even more powerful, nationwide criminal organization with enhanced capacity to organize effectively, act with impunity, corrupt at will, and when necessary, confront the Brazilian state.

It is hard to overstate the meaning of the settlement announced by U.S. authorities on December 21 with Odebrecht. Under this "largest-ever global foreign bribery resolution,"[1] the construction giant and its petrochemical subsidiary Braskem have agreed to pay at least $3.5 billion to Brazil, U.S. authorities, and the Swiss Office of the Attorney General. Of the total criminal fines, 80 percent of Odebrecht’s payments and 70 percent of Braskem’s payments will go to Brazil, a victory for both Brazilian prosecutors and for the cash-strapped Brazilian government. For anyone casually following the Lava Jato case in Brazil, the U.S. court documents offer a startling and precise summary of the wrongdoing that has been slowly revealed over the past three years by Brazilian prosecutors in the Lava Jato case. Odebrecht, which operates in twenty-eight countries, has admitted to paying $788 million in bribes in twelve distinct countries, in exchange for $3.34 billion in ill-gotten benefits. Its business model was rooted in a remarkable amount of subterfuge, including a shadow budget administered by a “Division of Structured Operations” using two shadow computer systems (one of which was destroyed in an effort to hide evidence). Payments were made through shell companies set up in Belize and the British Virgin Islands, and the company even bought a bank in Antigua to administer the offshore payment of bribes. The Odebrecht/Braskem agreements also offer a textbook illustration of several of the most devastating costs of corruption: The economic cost: Odebrecht and Braskem admit to paying $599 million in graft in Brazil alone, for $2.19 billion in ill-gotten gains, a 360 percent return on investment that presumably came at the expense of potential competitors and taxpayers. Said another way, these two companies alone made off with more than a third of the annual cost of Brazil’s much-vaunted Bolsa Familia conditional cash transfer program. Several other companies are still in prosecutors’ cross-hairs, suggesting that the direct economic costs of the corruption uncovered by Lava Jato could reach the double-digit billions. The indirect economic costs are even broader, including the nearly 100,000 Odebrecht employees who have been laid off in the wake of the revelations; The cost to public policy: the charging documents indicate that bribes enabled the two companies to force a variety of changes in pricing policies and tax credits, to pay legislators to rewrite statutes in their favor, and to prevent state-owned oil company Petrobras from terminating a joint venture with Braskem. Such insider efforts surely led to distortions in the policy framework, regardless of whether or not they contributed to the recession, as many critics of the Workers’ Party allege; The cost to democracy: as though the profound crisis in Brazil in recent years were not sufficient proof, the Odebrecht court documents show how corruption consequentially distorted politics. Brazilians have long suspected that off-books campaign contributions have given corrupt politicians an undue edge in Brazilian elections and may have even dwarfed official contributions. Legal campaign contributions during the 2010-2013 political cycle in Brazil totaled $2.2 billion. Odebrecht and Braskem were among the most important legal campaign contributors to candidates for federal office in 2014; their legal contributions that year, though, were a mere 3.5 percent of the total bribes these companies have admitted to paying between 2002 and 2014. In light of the many costs laid bare in the settlement, it is somewhat odd that reaction has been so low-key on the ground here in Brazil. Many Brazilians seem quite blasé, perhaps reflecting exhaustion after two years of drip-by-drip revelations of brazen corruption. It could be that Brazilians are ambivalent after recent over-reaching by prosecutors; or convinced by some defendants’ recent efforts to play the national sovereignty card. But it is more likely that Brazilians’ calm reaction may simply reflect the recognition that despite its unprecedented scale, the U.S. agreement is only one, early step toward accountability in a long process. Individual plea bargains from Odebrecht executives are still under review, several other companies and their executives are still negotiating agreements of their own, and the years-long criminal cases against sitting politicians are only just getting underway in the high court. [1] Although the total fines paid by Odebrecht and Braskem are the largest ever, Richard Cassin of FCPA Blog notes that it is not the largest FCPA enforcement action because the value paid to U.S. authorities is smaller than the US$1.6 billion paid by Siemens in 2008.

Half of the eighteen nations of Central and South America will hold presidential elections over the next two years.[1] The number of elections is not unprecedented, but the degree of uncertainty is, given the economic doldrums and political crises that have afflicted the region in recent years. As a consequence of the electoral outlook’s uncertainty, many of the coming year’s events in Latin America will need to be interpreted through the peculiar lens of candidates’ strategic calculations and parties’ maneuvering for advantage at the polls. Of the seven largest Latin economies, all but Peru face elections before the end of 2018. Argentina is the only one of the six remaining big countries that will not be holding presidential elections, but given the hostile Congress Mauricio Macri faces, the legislative elections of October 2017 will in many ways be a referendum on the course of his presidency, determining how far and fast he can bend Argentina’s course. In his first year, Macri has chalked up many achievements in the opposition-dominated Congress, approving more than seventy new laws. Growth is projected to reach as high as 3 percent in 2017. But inflation is stubbornly high, the fiscal deficit looms, and tax reform has stalled, none of which bodes well for Macri’s reform efforts. As a consequence, the legislative elections will be a bellwether of the country’s longer-term trajectory. Chile is in many ways the harbinger of the uncertain presidential election season. It will be the first of the large countries to go to the presidential polls, in November 2017. Incumbent Michelle Bachelet is barred from running for reelection, but the social conflicts of her presidency are very much center stage. Deteriorating relations between the Nueva Mayoria coalition and civil society have been highlighted by November public sector strikes, following a poor coalition showing in the October municipal elections. The Nueva Mayoría is fractured, and while former president Ricardo Lagos remains the frontrunner for the coalition’s nomination, he has had to push back against internal competitors such as Senator Isabela Allende Busi (who has withdrawn) and former OAS secretary general José Miguel Insulza (who has not). This means that the run-up to the mid-year primary that will select Nueva Mayoría’s candidate could be turbulent. In the face of this divided center, conservative former president Sebastián Piñera looks increasingly like the national frontrunner. But relative outsiders could still roil the race, from politicians such as Senator Alejandro Guiller to businessmen such as Leonardo Farkas. Colombia holds legislative elections in March 2018, followed by the presidential contest in May. The elections hinge on the fate of the new peace deal with the FARC rebels, which was narrowly defeated in a national referendum in October, renegotiated, and then unanimously approved in a December 2016 legislative vote (boycotted by opponents led by former president Álvaro Uribe). The fate of the peace deal is so deeply intertwined with the 2018 elections that the presidential election can be said to be a second, definitive referendum. Neither President Santos nor President Uribe can run for reelection, but their rivalry is playing out in the implementation of the deal. For Uribe and the right, the calculus seems to be that the longer implementation is delayed, the more likely the FARC can be driven back to conflict, and the less likely voters will support the deal. For Santos and the center-left, the calculus seems to be that a successful deal could help voters to set aside the unpopularity of Santos’ government in favor of a legacy of peace. The degree to which implementation can be delayed in the run-up to the mid-2017 disarmament deadline may therefore have big effects as the political campaigns begin to ramp up in the second half of the year. The next question is who will run, and how: the current frontrunner in the polls is Vice President Germán Vargas Lleras, whose Radical Change party falls on the center-right, in the space between the center-left that backs the peace and the uribistas on the right. If the center-left were to gel together, they might be able to pick up a legislative majority, but the question is whether the current leading center-left candidate, peace negotiator Humberto de la Calle, will have the popular support needed to take the presidency. Meanwhile, although none of the uribista candidates are currently polling strongly, it is possible that this could be an election decided in the second round of voting. Much will depend on the peace deal’s success in coming months. Mexico’s electoral season will be dominated by a politician from other parts: Donald Trump, whose August visit to the country was seen by many Mexicans as one more in a string of strategic miscalculations by incumbent Peña Nieto. Significant reforms opening the economy have been overshadowed by recrudescent violence, a ham-handed government response to the Ayotzinapa disappearances, and a string of corruption scandals that have diminished the governing party. The PRI was severely punished in the June 2016 gubernatorial elections, and repeated stories of corrupt governors—including some on the lam—have done little to improve its electoral chances. The top running PRI candidate, government secretary Miguel Angel Osorio Chong, currently polls in third place behind the PAN’s top-seeded Margarita Zavala (wife of former President Calderón) and the PRD’s Andres Manuel Lopez Obrador. Lopez Obrador has been seen as the candidate most likely to push back against the new U.S. administration’s efforts to revisit NAFTA and migration issues and, perhaps as a consequence, he has risen to meet Zavala in recent polls. Both far outpace Osorio, suggesting that whoever wins, this election will lead the country away from the PRI. In Brazil, Dilma Rousseff’s impeachment has thrown the political class into disarray. The big question at present is whether her successor, Michel Temer, will survive until the October 2018 vote: he faces an impeachment threat of his own, and his centrist coalition appears to be fraying in the face of a massive set of plea bargains by executives at construction giant Odebrecht. Given the breadth of political corruption exposed by the Car Wash investigation, it is hard to know who will be the last man standing. At present, it looks to be a woman, Senator Marina Silva (Rede), who leads head-to-head simulations of second round voting. Former President Lula, of the Workers’ Party, continues to lead in first round voting projections, but his high levels of rejection mean that Marina Silva could prevail in a second round. The big question in Brazil may be less about the presidential race, though, then about the coalition the new president must pull together to govern effectively in 2019. The judicial phase of the Car Wash investigations is unlikely to proceed quickly enough to remove scandal-ridden legislators from office by 2018, and the intricacies of Brazilian electoral law mean that voters may not do much better at throwing the bums out, however much they may wish to do so. There is at least the prospect, then, that an electorate desirous of change may elect a relative outsider such as Marina Silva as president, only to find that she is forced to govern with the same old crowd that has caused such upheaval in the first place. Finally, Venezuela, where elections are—in theory, at least—scheduled for December 2018. The profound economic and political crisis means that it is not even clear at this juncture whether elections will happen, much less who the candidates might be. The opposition Democratic Unity Roundtable (MUD) has dominated the National Assembly since 2015, but its efforts to impose a recall referendum have so far been sidetracked by a skillful set of dodges and parries by Hugo Chavez’s successor, President Maduro. Most recently, Maduro appears to have used Vatican-sponsored talks to delay any real discussion of a recall until January of next year, thereby ensuring that even if a recall were to take place, the PSUV would continue to govern.  Given unprecedented levels of popular discontent and the depth of the crisis, however, it is hard to envision a scenario in which Maduro survives as a viable candidate for the 2018 election, or continues in office beyond 2018 with any kind of popular mandate. Venezuela is in uncharted waters. [1] Brazil, Mexico, Colombia, Venezuela, Chile, Ecuador, Costa Rica, Paraguay, and Honduras.