Latin America’s Moment

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.

In yesterday’s presidential primaries Daniel Scioli unsurprisingly won the Peronist Frente para la Victoria (FPV) party primary, backed by Cristina Kirchner, with 38 percent of the total vote. The Cambiemos coalition, dominated by the PRO party, nominated current Buenos Aires mayor Mauricio Macri (30 percent). And Sergio Massa became the candidate for the UNA coalition, comprised of dissident Peronists (21 percent). On September 20, the three will begin their official campaigns for the October 25 presidential election (with a potential runoff on November 22). The results reflect a long holding Argentine maxim: when united the Peronists are impossible to beat. This reality is the main reason why Scioli, who has never had an easy relationship with Kirchner, acquiesced to her close ally Carlos Zannini as his running mate. In return, she forced challenger Florencio Randazzo to bow out of the primary race. Through this electoral alliance Kirchner hopes to maintain her influence and power. Yet history shows how difficult this will be—her predecessors all failed. Upon entering the Casa Rosada, Scioli will inherit a vast patronage network of millions of jobs and benefits built up during the Kirchner years and benefit himself from strong public support for these programs. "The Scion and the Heir," The Economist, August 1, 2015. And once out of office Kirchner’s political immunity ends. Numerous potential lawsuits await. In Nevada, a judge has ordered a deeper investigation into Mossack Fonseca, a Panamanian law firm accused of helping Kirchner’s friend Lázaro Báez embezzle and launder Argentine public funds. In Buenos Aires, Hotesur, a hotel management firm owned by Kirchner and her family, is under investigation for billing irregularities (also involving Báez). Zannini won’t be able to do much to help her as the vice presidency in Argentina, while symbolically important, is not institutionally powerful. Scioli may find it useful to keep Kirchner close for a time, calling on her to rally diehard loyalists for changes he wants to make. But he will have the power to dismiss her when her usefulness ends, leaving her to join Carlos Menem and Eduardo Duhalde as former Peronist presidents turned political outcasts. An unemotional politician, whatever Scioli decides will be very strategic.  

Hillel Soifer’s new book, State Building in Latin America, presents an interesting historical perspective on today’s current state capacity in Latin America, and why some countries are so much better able than others to not just control territory but also to deliver for their people. Somewhat dispiritingly, he finds that state capacity, measured in terms of education, health care, military mobilization, and other indicators has changed little over the last century. Government agencies’ abilities haven’t deviated much, despite the rise and fall of conservatives and populists, of democrats and dictators, of economic booms and busts. None seem to have fundamentally altered the ability of states to provide public goods. Those that were strong in 1900 are strong now; those weak then remain so. So what made the difference? He lays out two factors that emerged in the nineteenth century: whether political elites tried to build a strong state and then whether they succeeded. These in turn depend on other causes. The decision to try depends on whether elites clustered in one or in many cities or regions. Those with a single center were more likely to see state building as the way to “order and progress,” extending the center toward the periphery. Those with multiple hubs of economic and political activity were less likely to develop a coherent ideology, much less one that involved building up the central government. For those countries that did embark on a state building mission, other factors determined whether it worked or not. If the national government sent out its own bureaucrats to deliver services, the state grew in abilities and reach. If they left it to local elites, little happened. He then shows how these arguments apply to four cases: Colombia, Peru, Chile, and Mexico. Colombia never tried to create a stronger state; Peru tried and failed; Mexico and Chile both tried and succeeded to varying degrees. Soifer’s empirical chapters draw on government archives, newspaper announcements, immunization records, school enrollments, and many other sources, tracing the efforts and outcomes to try and build up the central government’s capacity. In his exhaustive research, he finds some interesting kernels that shed light on today’s pressing topics. For instance in Mexico in the late 1800s, school systems developed differently by state. In Michoacán and Guerrero local elites controlled the rollout, and enrollment stagnated, even back then. In Sonora and other northern states, the building out of their educational systems was turned over to bureaucrats from out-of-town; the number of kids entering school surged. These trajectories led to the deep divides that continue today and are at the center of the current struggle to reform Mexico’s education system. With “nation building” an at times uneasy part of U.S. foreign policy, Soifer’s carefully constructed argument and analysis provides insight into why it is so hard to do. It isn’t a lack of resources that many bemoan. It is oftentimes alliances with local elites. While they may quell unrest in the short term, they also can undermine the project itself, elevating challengers rather than allies in the quest to build government capacity. His work shows too that ideas matter: without leaders committed to a stronger state little will occur, whatever the intentions of outside participants and donors. For Latin America, his work leads to a clear eyed but somewhat pessimistic conclusion. The World Bank, Inter-American Development Bank, IMF, and others routinely identify the same set of factors as holding the region back: bad infrastructure, poor schools, weak rule of law, inequality, low productivity. Soifer’s conclusions suggest the usual policy recommendations—doling out concessions and forming public-private partnerships, writing new textbooks and instituting teacher evaluations, or retraining police and rewriting judicial rules—won’t change things. The challenge is a more fundamental one of capacity. And the question remaining is are there other paths than those he expertly illustrates to creating a better and stronger state.