Latin America’s Moment

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.

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.