Who Really Benefited from the Commodities Supercycle – and Who Loses with Its End?

By Carlos Monge*

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Latin American governments and business associations have tended to overstate the benefits of extractive industries during the commodities supercycle that ended in 2014-15.  Resource-rich Latin American countries did experience high rates of economic growth and diminished poverty and inequality during the boom years.  On the surface, this would appear to strengthen arguments that – despite their negative environmental impact – extractive industries are the key to progress, especially in resource-rich areas.  Nevertheless, a closer look at data from household surveys in Bolivia, Chile, Colombia, Ecuador, and Peru shows that things are a bit more complicated.

  • The inequality gap between individuals, as measured on the GINI Index, has narrowed, but the gaps between groups of the population have not evolved evenly. For example, the National Resource Governance Institute (of which I’m regional director) recently completed a study of the performance of social indicators during the supercycle that concluded that the poverty gap between urban and rural populations has increased in all countries.  (The report is available in English and Spanish.)  In Peru and Chile, the gap increased more in territories where extractive territories are located, while in Colombia, Bolivia, and Ecuador less so.  The gap between indigenous and non-indigenous populations increased only in extractive territories in Ecuador, decreasing in both extractive and non-extractive settings in the rest of the countries considered.  Regarding gender, in all five countries the gap between men and women increased slightly in non-extractive territories and decreased a bit more in extractive ones.

This report establishes correlations between the increase in extractive activities, the availability of extractive rents, and patterns of inequality reflected in social indicators, but it does not establish a causal relation between such variables.  For example, the data show that urban populations in Peru’s extractive regions have benefited more than rural ones – which some very preliminary research shows is probably because urban centers provide extractive projects with the goods and services they need, while less sophisticated rural areas do not.  At the same time, rural populations have to compete with the extractive projects for those same urban goods and services, and with local governments for the labor force that the public sector contracts to develop infrastructure projects that are paid for through increased revenues delivered by the extractive sector.  This is what we have called the “Cholo Disease.”  A variation of the “Dutch Disease,” it reflects a loss of competitiveness resulting not from large exports of raw materials causing the currency to appreciate, but rather from increases in the cost of labor and of urban goods and services consumed by campesinos.  However, a more definitive explanation regarding exactly how this happens in Peru and in other countries certainly needs further research.

While our data clearly show the impact of mining and hydrocarbons extraction and the resulting expenditure of extractive rents on the poverty gaps between urban and rural populations, men and women, and indigenous and non-indigenous populations, further investigation into the causes and consequences is needed.  The end of the supercycle has already meant a fall in growth rates and extractive revenues, leading to a worrisome rebound in poverty rates.  We are still unable to answer, however, the question of how broadly it will impact the substantial segments of Latin America’s population that emerged from poverty but remains in a vulnerable position – and how it will aggravate poverty gaps among individuals and between groups in extractive and non-extractive territories.

May 16, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.

Ecuador: Moreno’s Victory Probably Not Enough

By John Polga-Hecimovich*

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President-elect Lenín Moreno at a meeting to discuss the presidential transition in April 2017. / Agencia Noticias ANDES / Flickr / Creative Commons

President-elect Lenín Moreno’s narrow victory and modest legislative majority fall short of what he needs to push his costly leftist agenda while simultaneously bridging deep socio-political divisions and struggling with vexing economic challenges.  Moreno, of the ruling Alianza PAIS, narrowly defeated Guillermo Lasso of the CREO movement, 51.16 to 48.84 percent, in Ecuador’s presidential runoff election on April 2.  As a referendum on outgoing president Rafael Correa and his “Citizen’s Revolution,” the election marks a victory for Latin America’s ideological left after setbacks in Argentina, Brazil, and Peru.  The splintered opposition vote largely coalesced behind Lasso’s candidacy – he earned only 28.09 percent in the first round – but an uneven electoral playing field (including support from state-run media and Correa’s deployment of thugs to intimidate Lasso supporters) and his affiliation with the banking crisis of 1999 appear to have hurt him.

  • The incoming government appears committed to continuing Correa’s economic and social policies. Moreno is reassembling many of the further left members of Correa’s team for his own government, including powerful ex-ministers Fander Falconí and María Belén Moncayo.  Although he is more rhetorically moderate than his predecessor, Moreno is an avowed socialist.  As a young man, he was a member of the fringe Marxist-Leninist Revolutionary Left Movement, and as president-elect he has already promised an additional US$2 billion on top of the government’s already unsustainable social spending.  At the same time, Moreno has adopted a more conciliatory tone with the United States than Correa and has already made overtures to social movement leaders that had fallen afoul of the outgoing president.

Although Moreno will enjoy a legislative majority, he is taking office under difficult political and economic circumstances that will test his leadership.  The outgoing government’s politicization of public agencies like the National Electoral Council (CNE) has hurt the president-elect’s legitimacy.  The slim difference in the vote spawned protests outside the CNE in Quito by mostly middle-class members of the opposition.  What is more, despite assurances from the Organization of American States (OAS) and the local NGO Participación Ciudadana that the final vote closely aligned to their internal quick counts, a number of opposition voices maintain that there was electoral fraud. There are more challenges:

  • In the National Assembly, Moreno and his party won 54 percent of the seats (74 of 137) with just 39 percent of popular support due to clever districting and a seat allocation formula that favors large parties. Although this provides for unified government in a constitutional environment that can harshly penalize legislative gridlock, it is also disproportional to the popular support for the party.
  • Moreover, Moreno’s majority may also be more illusory than it appears. As many as 24 of Alianza PAIS’s 74 legislators, 32 percent of the movement’s total seats, were elected via electoral alliance between PAIS and a different party: seven from the Ecuadorian Socialist Party and the remainder from a panoply of inchoate provincial-level movements.  These legislators’ support for PAIS is not guaranteed.

Maintaining his heterogeneous alliance in a country with notoriously high levels of party switching will require a great deal of negotiating skill and flexibility of the inexperienced Moreno.  He possesses limited policymaking options to confront an unviable fiscal situation – the deficit doubled in 2016 – and economic slowdown – according to the IMF, the economy contracted by 2.2 percent in 2016 and is expected to decrease by an additional 1.6 percent in 2017 – and an overvalued currency in real terms.  The Moreno administration confronts the unenviable task of continuing and even expanding an economically costly political project in the midst of fiscal constraints, a fragile political majority, and a limited popular mandate among deep social divisions.  Less daunting situations have felled more experienced leaders in Ecuador’s history.

May 8, 2017

*John Polga-Hecimovich is an Assistant Professor of Political Science at the US Naval Academy.  The views expressed in this article are solely those of the author and do not represent the views of or endorsement by the Naval Academy, the Department of the Navy, the Department of Defense, or the US government.

A Return to Political Instability for Ecuador?

By John Polga-Hecimovich*

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Presidential candidate Guillermo Lasso (center, blue shirt) in Cuenca, Ecuador during a campaign rally last month. / Samurai Juan / Flickr / Creative Commons

General elections on Sunday could mark the beginning of the end of an impressive period of stability in Ecuador. Ecuadorians will elect a new congress and a replacement for the powerful and populist Rafael Correa, the longest-serving chief executive in the country’s history. Although the president’s handpicked successor, ex-Vice President Lenín Moreno is leading public opinion polls with 32 percent of likely voters in a crowded eight-candidate field, the chances of him winning a first-round victory outright are slim. Public approval of Correa and his ruling Alianza PAIS (AP) has fallen over the past two years as economic growth has slowed, and the administration is embroiled in allegations of corruption, including those against Jorge Glas Espinel, incumbent vice-president and Moreno’s running mate. Given Ecuador’s two-round presidential system, in which candidates must win by 10 percent or gain 40 percent of the vote, Moreno probably will end up in a run-off election on April 2.

  • The other seven candidates are vying for the chance to face Moreno in the second round. Three of them poll between 8 and 21 percent, and the rest appear to have 4 percent or less of the vote. However, rejection of the entire field is high – nearly 12 percent of respondents say they will cast a null vote – and a whopping 35 percent maintain that they are undecided.

Moreno does not appear likely to win the runoff. The Economist Intelligence Unit predicts that voters will coalesce around an opposition candidate – most likely the CREO movement’s Guillermo Lasso, a conservative former economy minister and banker who ran a distant second to Correa in the 2013 presidential race – who would then defeat Moreno.

  • If Moreno and Glas win, they will likely continue Correa’s leftist “Citizens’ Revolution,” especially its improvements to social welfare and emphasis on science and technology, and maintain close ties with China, which has become a key partner in trade and infrastructure investment over the past decade. If the opposition wins, it will try to repeal some of Correa’s onerous taxes, reverse stringent regulation of the media, shrink the size of the state, and seek improved relations with the U.S.

Regardless of who wins, the fragmented support for the candidates and their parties bodes poorly for Ecuador’s political stability, especially in the context of fiscal constraints, a stagnant economy, and burden of recovery from last April’s 7.8-magnitude earthquake. The so-called muerte cruzada (mutual death) in Article 148 of the country’s 2008 Constitution, moreover, will loom larger under a divided government. This clause gives the president a political “nuclear option” to dissolve the National Assembly in the event of gridlock, triggering new legislative and presidential elections – while the incumbent president is allowed to rule by decree on urgent economic matters in the interim. Correa, who enjoyed majority or near-majority government throughout his unprecedented ten-year presidency, never invoked the muerte cruzada, but his successor will feel stronger temptation to dissolve the Assembly in order to govern unilaterally. Ecuadorians should brace for an end to the country’s unprecedented political stability – and for the specter of Correa, much like the possibility of muerte cruzada, to loom large over the new government’s economic and political decisions.

February 17, 2017

* John Polga-Hecimovich is an Assistant Professor of Political Science at the U.S. Naval Academy. The views expressed in this article are solely those of the author and do not represent the views of or endorsement by the Naval Academy, the Department of the Navy, the Department of Defense, or the U.S. government.

Intense Electoral Year in Latin America

By Carlos Malamud*

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Chilean President Michelle Bachelet with the leaders of her coalition, Nueva Mayoría. The Chilean presidential election of 2017 will determine the legacy of the Nueva Mayoría. / Gobierno de Chile / Flickr / Creative Commons

The new year will be an intense one for Latin American elections.  Although perhaps not as important as those taking place in 2018, this year’s elections will have a significant impact on the countries holding them and, in some cases, the region as a whole.

  • In Ecuador’s presidential and legislative elections on February 19, the PAIS Alliance will run a slate of nominees for the first time without Rafael Correa heading its slate. The President said he’s stepping down for family reasons, but Ecuador’s economic problems, aggravated by the decline in oil prices, apparently convinced him to seal his legacy on a high note now rather than end his time in office in defeat.  The party’s presidential candidate, former Vice President Lenin Moreno, has a 10-point lead in polls over his closest competitor and has the advantage of facing an opposition divided among seven candidates, but his leadership remains uncertain.
  • In Mexico, the state governors of México, Nayarit, and Coahuila and mayor of Veracruz are up for election on June 4. The race in México state will measure the popular backing of the four parties in contention – PRI, PAN, PRD, and López Obrador’s new Movimiento Regeneración Nacional (Morena) – in the 2018 presidential election.  The older parties will begin to weed out the weaker pre-candidates.
  • Elections for half of the Argentine Congress and a third of its Senate in October will define the second half of President Mauricio Macri’s presidency. The government is confident that economic recovery will strengthen its election prospects.  A weak showing will strengthen the Peronista opposition and complicate Macri’s agenda.  The Peronistas are currently divided into three big factions – that of Sergio Massa; the “orthodox” wing headed by some provincial governors, and corruption-plagued Kircherismo grouping headed by former President Cristina Fernández.  Open, simultaneous, and obligatory primaries (known by the Spanish acronym PASO) in August will be an important test for all.
  • Chile will elect a successor to President Michelle Bachelet on November 19. Primaries in July will reveal whether the country’s two big coalitions – the center-left (including the President’s Nueva Mayoría) and the center-right – are holding, as well as the presidential candidates’ identity.  The names of former Presidents Sebastián Piñera and Ricardo Lagos are in the air, but it’s too early to know how things will play out in the environment of growing popular disaffection with politics and politicians.
  • Honduras will hold elections on November 26. Due to a Supreme Court decision permitting reelection, incumbent President Juan Orlando Hernández could face a challenge from ex-President Manuel “Mel” Zelaya, who was removed from office by the Army in June 2009, running as head of the Libertad y Refundación (Libre) Party.
  • Also in November, Bolivia will elect members of various high courts, including the Constitutional, Supreme, and Agro-Environmental Tribunals and the Magistracy Council. These elections will reveal the support President Evo Morales will have as he tries to reform the Constitution to allow himself to run for yet another term in office.

These elections in 2017 have a heavy national component but will shed light on the region’s future direction.  The success or failure of the populist projects in Ecuador and Honduras, or of President Bachelet’s Nueva Mayoría in Chile, will tell us where we are and, above all, help us discern where we’re headed.

January 17, 2017

*Carlos Malamud is Senior Analyst for Latin America at the Elcano Royal Institute, and Professor of Latin American History at the Universidad Nacional de Educación a Distancia (UNED), Madrid.  This article was originally published in Infolatam.

2017: Happy New Year in Latin America?

By Eric Hershberg and Fulton Armstrong

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Brazilian President Michel Temer surrounded by members of his party in mid-2016. His government will continue to face questions of legitimacy in 2017. / Valter Campanato / Agência Brasil / Wikimedia / Creative Commons

The year 2016 laid down a series of challenges for Latin America in the new year – not the least of which will be adapting to a radically different administration in Washington.  Last year saw some important achievements, including an elusive peace agreement in Colombia ending the region’s oldest insurgency.  Several countries shifted politically, eroding the “pink tide” that affected much of the region over the past decade or so, but the durability and legitimacy of the ensuing administrations will hinge on their capacity to achieve policy successes that improve the well-being of the citizenry.  The legitimacy of Brazil’s change of government remains highly contested.  Except in Venezuela, where President Maduro clung to power by an ever-fraying thread, the left-leaning ALBA countries remained largely stable, but the hollowing out of democratic institutions in those settings is a cause for legitimate concern.  Across Latin America and the Caribbean, internal challenges, uncertainties in the world economy, and potentially large shifts in U.S. policy make straight-line predictions for 2017 risky.

  • Latin America’s two largest countries are in a tailspin. The full impact of Brazil’s political and economic crises has yet to be fully felt in and outside the country.  President Dilma’s impeachment and continuing revelations of corruption among the new ruling party and its allies have left the continent’s biggest country badly damaged, with profound implications that extend well beyond its borders.  Mexican President Peña Nieto saw his authority steadily diminish throughout the course of the past year, unable to deal with (and by some accounts complicit in) the most fundamental issues of violence, such as the disappearance of 43 students in 2014.  The reform agenda he promised has fizzled, and looking ahead he faces a long period as a lame duck – elections are not scheduled until mid-2018.
  • The “Northern Triangle” of Central America lurches from crisis to crisis. As violence and crime tears his country apart, Honduran President Hernández has devoted his energies to legalizing his efforts to gain a second term as president.  Guatemala’s successful experiment channeling international expertise into strengthening its judicial system’s ability to investigate and prosecute corrupt officials is threatened by a weakening of political resolve to make it work, as elites push back while civil society has lost the momentum that enabled it to bring down the government of President Pérez Molina in 2015.  El Salvador, which has witnessed modest strides forward in dealing with its profound corruption problems, remains wracked with violence, plagued by economic stagnation, and bereft of decisive leadership.
  • Venezuela stands alone in the depth of its regime-threatening crisis, from which the path back to stability and prosperity is neither apparent nor likely. The election of right-leaning governments in Argentina (in late 2015) and Peru (in mid-2016) – with Presidents Macri and Kuczynski – has given rise to expectations of reforms and prosperity, but it’s unclear whether their policies will deliver the sort of change people sought.  Bolivian President Morales, Ecuadoran President Correa, and Nicaraguan President Ortega have satisfied some important popular needs, but they have arrayed the levers of power to thwart opposition challenges and weakened democratic institutional mechanisms.
  • As Cuban President Raúl Castro begins his final year in office next month, the credibility of his government and his successors – who still remain largely in the shadows – will depend in part on whether the party’s hesitant, partial economic reforms manage to overcome persistent stagnation and dissuade the country’s most promising professionals from leaving the island. Haiti’s President-elect Jovenel Moise will take office on February 7 after winning a convincing 55 percent of the vote, but there’s no indication he will be any different from his ineffective predecessors.

However voluble the region’s internal challenges – and how uncertain external demand for Latin American commodities and the interest rates applied to Latin American debt – the policies of incoming U.S. President Donald Trump introduce the greatest unknown variables into any scenarios for 2017.  In the last couple years, President Obama began fulfilling his promise at the 2009 Summit of the Americas in Trinidad and Tobago to “be there as a friend and partner” and seek “engagement … that is based on mutual respect and equality.”  His opening to Cuba was an eloquent expression of the U.S. disposition to update its policies toward the whole region, even while it was not always reflected in its approach to political dynamics in specific Latin American countries.

 Trump’s rhetoric, in contrast, has already undermined efforts to rebuild the image of the United States and convince Latin Americans of the sincerity of Washington’s desire for partnership.  His rejection of the Trans-Pacific Partnership – more categorical than losing candidate Hillary Clinton’s cautious words of skepticism about the accord – has already closed one possible path toward deepened ties with some of the region’s leading, market-oriented economies.  His threat to deport millions of undocumented migrants back to Mexico and Central America, where there is undoubtedly no capacity to handle a large number of returnees, has struck fear in the hearts of vulnerable communities and governments.  The region has survived previous periods of U.S. neglect and aggression in the past, and its strengthened ties with Asia and Europe will help cushion any impacts of shifts in U.S. engagement.  But the now-threatened vision of cooperation has arguably helped drive change of benefit to all.  Insofar as Washington changes gears and Latin Americans throw up their hands in dismay, the region will be thrust into the dilemma of trying to adjust yet again or to set off on its own course as ALBA and others have long espoused.

 January 4, 2017

Latin America: Wait-and-See Reaction to Trump – For Now

By Catie Prechtel and Carlos Díaz Barriga*

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An effigy of Donald Trump in Mexico City. / Sequence News Media / Daniel Becerril / Wikimedia / Creative Commons

Most Latin American leaders publicly reacted with caution to Republican presidential candidate Donald Trump’s victory in last week’s U.S. elections, but reactions will sharpen quickly if Trump tries to make his campaign rhetoric about the region and Latino immigrants into policy.  Mexico and Central America showed clear anxiety over the implications for their economies and regional migration pressures.  Some South American presidents expressed mild enthusiasm and voiced hope for a positive relationship with the new administration, although Trump’s avowed opposition to the Trans-Pacific Partnership trade accord – under discussion at the APEC summit in Lima this week – has fueled concerns about the future of free trade.  Fear that the new U.S. President, who takes office on January 20, will deport millions of undocumented migrants from Mexico and Central America and force U.S. firms to shut factories in those countries has seized the media there.

  • Mexican newspapers headlines screamed “Be afraid!” and warned of a “Global shakedown.” Reports recited the many promises Trump had made against Mexico, including his proposal to build a border wall (and make Mexico pay for it); revising NAFTA and raising taxes on Mexican imports, putting conditions on remittances, and charging more for visas. The peso suffered three consecutive days of losses before recovering slightly following interviews by Trump and his team suggesting a softer stand on the wall and free trade.  President Peña Nieto phoned Trump with congratulations and agreed to meet soon to discuss bilateral issues, including presumably the wall.
  • Guatemala’s Prensa Libre reported businessmen are worried Trump’s rejection of free trade could have a direct impact on the economy and described the possible mass deportations as a “social bomb” for the country. In Nicaragua, newspapers speculated that Trump’s victory will give a boost to U.S. legislation, the Nicaragua Investment Conditionality Act (NICA), which calls for economic sanctions if President Daniel Ortega doesn’t take “effective steps” to hold free and fair elections.  In El Salvador, the main concern is the deep economic stresses of mass deportations of Salvadorans in the United States.  Honduras shares those concerns but apparently was more wrapped up in President Juan Orlando Hernández’s announcement confirming his intention to make a controversial bid for reelection.
  • Venezuelan President Nicolas Maduro, often given to bombastic rhetoric, has focused on working with Washington in the closing months of the Obama Administration. In a phone conversation with Secretary of State John Kerry, he stressed the need to establish an agenda with the next administration that favors bilateral relationships, but he specifically called on Obama to “leave office with a message of peace for Venezuela” and rescind a determination that Venezuela is a “threat to the United States.” Obama himself last April said the designation was exaggerated.
  • Media in Colombia speculated that Trump will be less committed to aid and support for finalizing and implementing a peace accord with the FARC. Argentina, Brazil, and Chile offered calm reactions to the news.  For Buenos Aires and Santiago, the biggest concern was potentially strained commercial relationships and free trade agreements with the United States, according to press reports.  Brazil offered little reaction to the news, but Trump’s win brought four consecutive days of losses for the real – weakening 7.6 percent since the election.

The political leaders’ cautious reactions conceal a broad and deep rejection for President-elect Trump’s values and intentions as he stated them during the campaign.  Former Mexican President Vicente Fox once again tweeted his disapproval for Trump, while José Mujica, former President of Uruguay, expressed dismay on Twitter, summing up the situation in one word: “Help!”  Press reports and anecdotal information indicate, moreover, that large segments of Latin American society have shown a widespread distaste for Trump’s win.  Their general wait-and-see attitude will end when and if Trump proves himself the unpredictable and reactionary he seemed on the campaign trail.  Latin American leaders have a lot of work ahead as they navigate a new relationship with the United States.

November 15, 2016

* Catie Prechtel and Carlos Díaz Barriga are CLALS Graduate Assistants.

Political Upheaval in South America

By Eric Hershberg

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Thousands of protesters in Maracaibo, Venezuela. Photo Credit: Google Images / Creative Commons

2016 is proving to be this century’s most complicated year to date for South American political systems, and the coming months will be critical to assessing how well the region’s democracies can govern amid declining economic conditions and spiraling corruption scandals.  Brazil and Venezuela – two very different systems with very different problems – are suffering the most visible crises.

  • In Venezuela, where the Bolivarian project has descended into an incompetent Putinism in the tropics, is collapsing under the weight of monumental mismanagement of the economy. Many of the ills of the Venezuelan petrostate predate Chavismo, but during a collapse in oil prices President Maduro has doubled-down on profligate economic policies introduced by Hugo Chávez, bringing the country to catastrophe made worse by increasingly draconian repression of loyal and disloyal opposition alike.
  • President Dilma Rousseff’s mismanagement of coalitions in a presidential system predicated on coalition-building has opened the way to political and economic implosion in Brazil.  Contrary to the fervent assertions of important segments of the Workers Party (PT), her impeachment does not precisely constitute a coup, but it may indeed amount to an ill-advised bending of institutional mechanisms by cynical legislators and aggressive judges, egged on by rightist sectors whose commitment to democracy is in fact dubious.  Dilma didn’t invent the corruption and footloose budgetary practices that have been her undoing, but her fall does respond to overwhelming popular rejection of her performance.  Interim President Temer’s appointment of an entirely white male cabinet that includes representatives of some of the country’s most retrograde interests suggests abandonment of many of the most laudable achievements of more than a decade under PT rule – and more backlash as well.

Other institutional crises may be on the horizon.  Ecuadoran President Rafael Correa pursued a high-risk strategy of debt-driven expansion of the state, which is not sustainable amid economic contraction.  Argentine President Mauricio Macri’s honeymoon may prove short-lived.  Much-needed economic reforms are likely to provoke even greater inflation and have already stoked resistance from the Peronist opposition.  Macri enjoys some unprecedented assets – for the first time non-Peronists also control the city and province of Buenos Aires– but Argentine public opinion overwhelmingly favors statist economic policies that he aims to dismantle, and no non-Peronist elected president has completed his term in office since the rise of Peronism as a political force.  Chilean President Michelle Bachelet, wounded by a drop in mineral export revenues and comparatively minor corruption allegations involving her daughter-in-law, reshuffled her cabinet earlier this month but continues to tank in the polls.  Latinobarómetro reports that 70 percent of Chileans believe their political system doesn’t work.

It’s not hard to envision other relatively stable South American democracies facing hard times ahead.  The June 5 presidential runoff in Peru could leave the country deeply polarized, especially if Keiko Fujimori, heiress to the country’s darkest episode in recent history, wins.  It is not a foregone conclusion that Colombian President Juan Manuel Santos, who has staked his second term on a long-awaited and much-needed peace accord, will secure its ratification, risking lameduck status for the remainder of his administration.  If the presidents elsewhere appear to be weathering the storm, democratic governance nonetheless faces important challenges.  It would be rash to predict that democracy will fail the test – and that such failure will give rise to a new era of authoritarian rule – but it’s clear that the region will witness widespread instability during the coming years.

May 26, 2016

The Panama Papers: Damning Evidence Against Latin American Elites?

By Emma Fawcett* and Fulton Armstrong

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Photo Credit: Pixabay / CC0 Public Domain

The “Panama Papers” have revealed the reputed secret accounts and tax-evasion strategies of a number of Latin American leaders, but preexisting widespread perceptions that political and economic elites are corrupt may reduce the immediate shock value of the revelations.  More than 11 million documents leaked from the Panama-based law firm Mossack Fonseca – given an initial review by the Süddeutsche Zeitung and International Consortium of Investigative Journalists (ICIJ) – provide evidence of 215,000 arrangements by which 14,153 powerful and wealthy clients from around the world hid their money from the prying eyes of the media, tax collectors, and public-accountability experts.  Early reports already indicate Latin Americans – small-time players compared to the Russians and some Europeans – are among those mentioned.

  • The Petrobras scandal that has paralyzed Brazil will find further fuel in these files. Investigators in Operation Car Wash apparently had no knowledge of many accounts held by Petrobras officials.  A secret company linked to House Speaker Eduardo Cunha, who’s leading the charge to impeach President Rousseff, reportedly figures prominently.
  • Argentine President Macri, his father, and brother reportedly had an offshore company for 10 years. They closed it in 2009, two years into Macri’s term as Buenos Aires mayor, but he did not report it.  The government says he was only “circumstantially” the CEO.
  • The president of the Chilean branch of Transparency International, Gonzalo Delaveau, resigned because he was linked to at least five offshore companies.
  • Mexican President Peña Nieto’s association with tycoon-contractor Juan Armando Hinojosa, who reportedly had a massive array of shelters worth US$100 million, is once again a liability. The President was dragged through the mud – and eventually exonerated of personal involvement – over a mansion that Hinojosa allegedly gave to his wife.  The Mexican government is investigating several dozen others named in the documents.
  • Many other cases are in the wings. Pedro Delgado (former governor of Ecuadorian Central Bank and cousin of President Correa); financial backers of Peruvian Presidential candidate Keiko Fujimori; and an array of former central bank and intelligence officials – Peruvians, Venezuelans, Panamanians, and others – are all being looked at.  In El Salvador, the Attorney General, already criticized for his investigative zeal, has raided Mossack Fonseca’s offices, suggesting more revelations to come.

Allegations of tax evasion, hidden income, and other forms of corruption are a mainstay of Latin American political lifeand the Panama revelations will only aggravate the oft-held opinion that rich, powerful people play by their own rules to maintain wealth and power.  Ramón Fonseca, one of the founders of the law firm, claims that the publicity is part of “an international campaign against privacy,” which he called “a sacred human right [and] there are people in the world who do not understand that.”  The backlash against someone like Argentine President Macri may not be too great, especially because his family ended the tax haven years ago.  But what makes the allegations potentially disruptive is the number of people implicated – across public and private sectors – in so many countries, in an investigation that has only just begun.  Further revelations are sure to come and, although themselves a sign of transparency, challenge people’s faith that leaders will come clean.  The revelations will fuel popular cynicism and discontent in the short term, but renewed demands for transparency may eventually help rekindle popular confidence in government.

April 11, 2016

*Emma Fawcett is a PhD candidate in International Relations at American University.   Her doctoral thesis focuses on the political economy of tourism and development in four Caribbean case studies: Haiti, Dominican Republic, Cuba, and the Mexican Caribbean.

How are the Americas Faring in an Era of Lower Oil Prices?

By Thomas Andrew O’Keefe*

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Photo Credit: Josué Goge / Flickr / Creative Commons

The sharp drop in global oil prices – caused by a combination of a slowing Chinese economy hurting commodities sales and efforts by Saudi Arabia to retain market share – has both downsides and advantages for Latin America and the Caribbean.  By keeping production levels steady, despite decreased demand, so that a barrel of crude remains below US$40, the Saudis’ hope is to put U.S. shale oil producers and Canadian tar sands producers out of business.  The drop in oil prices has had a varied impact elsewhere in the Americas:

  • The effect in Venezuela, already reeling from over a decade of economic mismanagement, has been catastrophic. The ripple effect is being felt in those Caribbean and Central American countries that grew to depend on PetroCaribe’s generous repayment terms for oil imports that allowed savings to be used for other needs.  In 2015, for example, this alternative funding mechanism in Belize was slashed in half from the previous year.  The threat of interest rate hikes on money that must eventually be repaid for oil imports also pushed the Dominican Republic and Jamaica to use funds raised on international capital markets to reduce their debt overhang with Venezuela.  (For those weening themselves off PetroCaribe dependency, however, the lower prices are a silver lining.)
  • Low oil prices have also knocked the wind out of Mexico’s heady plans to overhaul its petroleum sector by encouraging more domestic and foreign private-sector investment.
  • In South America, the decline has undermined Rafael Correa’s popularity in Ecuador because the government has been forced to implement austerity measures. The Colombian state petroleum company, Ecopetrol, will likely have to declare a loss for 2015, the first time since the public trading of its shares began nine years ago.  In Brazil, heavily indebted Petrobras has seen share prices plummet 90 percent since 2008, although that is as much the result of the company being at the center of a massive corruption scandal that has discredited the country’s political class.
  • On the other hand, lower petroleum prices have benefitted net energy importers such as Chile, Costa Rica, Paraguay, and Uruguay.

The one major oil producer in the Americas that has not cut back on production and new investment is Argentina – in part because consumers are subsidizing production and investment by the state petroleum firm YPF, which was renationalized in 2012 and now dominates domestic end sales of petroleum products.  Prices at the pump remain well above real market values.  While successive Argentine governments froze energy prices following the 2001-02 implosion of the Argentine economy, this time policy is keeping some energy prices high.  This encourages conservation and efficiency and spurs greater use of renewable alternatives, but it becomes unsustainable during a prolonged dip because it will, among other things, make the country’s manufacturers uncompetitive.  The Argentine example underscores that predictions of a pendulum shift in Latin America in favor of private-sector investment in the hydrocarbons sector over state oil production are still premature.

The lower prices do not appear likely to harm the region’s continuing substitution of natural gas for coal and oil as a transitional fossil fuel to greener sources of energy.  Natural gas prices remain at their lowest levels in over a decade, and the expansion of liquefied natural gas plants allows for easier transport of natural gas to markets around the world.  They are also unlikely to dent the global shift to greater reliance on renewable energy resources driven by the international consensus that climate change can no longer be ignored and something must be done to address it.  At the UN climate change talks in Paris last December, for example, countries agreed to keep temperature increases “well below” 2 degrees centigrade above pre-industrial levels and made a specific commitment “to pursue efforts” to achieve the much more ambitious target of limiting warming to no more than 1.5 degrees centigrade.  The year 2015 was the second consecutive year in which energy-related carbon emissions remained flat in spite of 3 percent economic growth in both years. 

March 24, 2016

*The author is the President of San Francisco-based Mercosur Consulting Group, Ltd.  He chaired the Western Hemisphere Area Studies program at the U.S. State Department’s Foreign Service Institute between July 2011 and November 2015.

Lobbying Washington: Does it Work?

By Aaron T. Bell*

LatAm Lobbying

Photo credits: Jack Says Relax & AlexR. L., respectively / Flickr and Wikimedia Commons / Creative Commons

Latin American governments, political parties, and business associations have a long history of turning to U.S.-based lobbying, legal, and public relations firms to advance their interests in the United States – with mixed results.  Both national and multinational groups have been utilizing lobbyists since at least the 1940s, when the U.S. government began registering foreign agents.  Their most consistent goal over the decades has been to influence U.S. policy on foreign trade and investment, but they have also aimed to improve governments’ sagging reputation and protect them from adverse policies.  In the 1970s, a number of military regimes and right-wing political groups in Central and South America hired lobbyists to devise and implement strategies to counter criticism of their human rights record – to preserve trade and military assistance.

  • Some 30 Latin American countries and interests groups in 2010-14 registered foreign agents to influence U.S. policies. The Bahamas Ministry of Tourism spent the most, paying $128.9 million to promote tourism – as well as to monitor and speak with Congressional representatives about U.S. legislation related to transnational financial activities in which they are involved, such as the regulation of offshore tax havens and online casinos.
  • In 2013, Mexico ranked fifth worldwide, at $6.1 million. Both federal and local governments pay firms to burnish the image of their respective constituencies.  From 2010-12, for example, Mexico City worked with a firm to “enhance the image of Mexico City in light of recent negative media reports.”  In 2014, the Consejo de Promoción Turístico de México hired another company to “make Mexico an attractive destination.”
  • Ecuador, which at $1.1 million ranked twenty-second in 2013, spent nearly half a million dollars lobbying in support of the ultimately failed Yasuni rain forest oil drilling initiative.
  • More recently, the government of Honduras – burdened with the image as one of the most violent, corrupt, and crime-ridden countries in the world – hired lobbyists to “provide ongoing strategic counsel, media relations (proactive and reactive outreach), and third-party relations.” The firm, winning an initial one-year contract for $420,000, had just completed a nine-year relationship representing Russia.

A review of the U.S. Foreign Agents Registration Act (FARA) records indicates that foreign lobbyists represent almost exclusively governments, state agencies, and the private business sector, and that more popular civil-society actors – such as labor unions and indigenous organizations – are notably absent.  Even though foreign governments obviously judge the investment worthwhile, the impact of foreign-funded lobbyists is difficult to measure.  The Honduran government’s new push to burnish its image has paid off on Capitol Hill, according to observers, but a new initiative to reduce Honduran corruption doesn’t appear to have gone exactly as Tegucigalpa hoped.  Forced to respond to a protest wave calling for the creation of an independent investigative body similar to the Comisión Internacional contra la Impunidad en Guatemala (CICIG), the Honduran government agreed with the OAS to create the Misión de Apoyo Contra la Corrupción y la Impunidad en Honduras (MACCIH) as a collaborative effort.  MACCIH indeed lacks the independence – and the potential bite – that CICIG had, but it is significantly tougher than the Honduran President Juan Orlando Hernández initially proposed.  In this case at least, lobbyists have helped the government gain access and public relations points in Washington but didn’t get it off the hook entirely.

January 22, 2016

* Aaron Bell is an adjunct professor in History and American Studies at American University.