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The Present Economic Dead End In Leftist Latin American Politics

250px-Banco_del_SurDuring the global commodity boom that lasted most of the 21st century, there was little impetus for economic and financial reforms in Latin America. The world economy was generating sufficient growth to lift some 60 million people out of abject poverty in South America alone. The middle class was growing rapidly, as investors in the region and from around the world, flocked to invest in the natural resources that were being exploited. Growth averaged over 4% during these years, allowing the possibility that a number of nations in the area would soon join the first world.

The global price for commodities had increased by 300% during the years 2003 to 2011 alone. This generated enormous new wealth in a number of countries. Chile had already graduated from emerging to advanced status in economic development. Argentina, Brazil, Colombia, Costa Rica, Mexico, Panama, Uruguay, and a number of other nations seemed to be waiting in the wings.

Moving towards a more balanced economy. Colombia's gross domestic product by sector for the second half of the year 2015.

Moving towards a more balanced economy. Colombia’s gross domestic product by sector for the second half of the year 2015.

Unfortunately, much of this economic development was overly dependent on the trade in commodities. If demand for these began to slacken, it would bring trouble for the entire region of Latin America. During the years of abundance, steps should have been taken to restructure the economy. It would of provided a path to sustainable growth, once the bonanza in commodities ended.

Latin America as a whole, had failed to capitalize on past periods of prosperity. Wealth remained concentrated in far too few hands and investment was skewed towards natural resource extraction and agricultural exports. The boom at the beginning of this century, would prove to be quite similar. Reforms in many countries in the region, only arrive when economic circumstances force change in policy.

For much of the second half of the 20th century, political leadership in Latin America has been more concerned with redistributing wealth, rather than how to generate sustainable growth. The populace has been repeatedly seduced by the promise of prosperity, coming from government sponsored schemes for development.

Latin America

Latin America

Many of these regime supported strategies, resulted in a vast misallocation of resources. The top heavy system management of these businesses has lead to corruption and crony capitalism on a widespread scale. The close cooperation between these conglomerates and government officialdom encourages inefficiency and a lack of innovation.

As democracy continued to spread in the second half of the 20th century, Latin American politicians learned to acquire and maintain power by promising constituents an ever increasing bounty from government coffers. This gradually sapped the money that was needed for infrastructure and help dent further expansion in the private market.

The near collapse in commodity prices brought economic growth in the region down to just 1.3% in 2014 and is projected to drop to below 1% this year. It will be the 5th straight year of decelerating growth. Latin America as a whole is far more dependent on the export of commodities, so the global economic slowdown has been particularly difficult for the area. The general decline has been far greater, than any other emerging market.

The dramatic decline in economic growth has coincided with a precipitous decline in investment as well since 2011. Foreign investors have decided to pull funds from the region as the trade in commodities became less lucrative. Financial markets in Latin America have witnessed the withdrawal of the equivalent of hundreds of billions of American dollars. Stock markets are in decline throughout the region as new investment has stalled.

Map of countries by external debt as a percentage of GDP

Map of countries by external debt as a percentage of GDP

Another side effect of this new economic reality, is the rapid deprecation of national currencies throughout the region on average of 20%. It is a clear reflection of the economic weakness that is permeating throughout the area in general. Various efforts to strengthen individual currencies has largely failed and has simply drawn down foreign exchange reserves. The decline in valuation is merely a refection of the broad decline in economic health.

The leftist governments of the region have few answers to turn things around, except to propose more spending to stimulate the economy which has the unfortunate side effect of adding more debt at the state and national level. It also is assisting in the decline of national currencies in the region. To prevent that a number of countries have instituted capital controls, which has the perverse effect of chasing away foreign investment altogether.

100px-Red_flag_waving.svgThe socialist policies that were so popular during the boom time in commodities are simply unaffordable in these new economic conditions. A number of governments who came to power stressing the need to end economic injustice and promoting greater social equality, are ill suited for the new era of declining fortunes.

The more these governments involve themselves in controlling the national economy, the ever greater likelihood that private investment will be further stifled. Neither the political leadership nor a sizable portion of the electorate, will face the reality that one cannot legislate prosperity. All a government can do is provide the proper environment where investment and economic opportunity can thrive.

Campaigning with her husband, then-President Néstor Kirchner (outgoing), and their respective running mates, Daniel Scioli and Julio Cobos.

Campaigning with her husband, then-President Néstor Kirchner (outgoing), and their respective running mates, Daniel Scioli and Julio Cobos.

Argentina is facing a presidential election this month. The leftist husband and wife team that has dominated politics in the country since 2003, will finally come to an end this year. Years of economic mismanagement and currency manipulation have brought ruin to the domestic economy. Inflation was officially recorded at 14.70% in August, but many theorize it is running at a much higher rate. At the beginning of the year it was near 24%. Further reductions in unemployment have also stagnated. The country has been consistently accused of doctoring official economic statistics.

Despite the disastrous economic record of President Cristina Fernandez de Kirchner in office since 2007, the political party she represents is ahead in the polls. Her constant ongoing battle with the IMF (International Monetary Fund) and international creditors have caused a massive flight of foreign capital from Argentina. The country is considered a high risk investment and is struggling with massive budget deficits, which tops more than 5% pf GDP (Gross Domestic Product) and rising national debt. The country meets its financial obligations by borrowing heavily from the central bank. The current situation is clearly unsustainable.

Dilma Rousseff with Lula during the 2010 presidential campaign.

Dilma Rousseff with Lula during the 2010 presidential campaign.

In Brazil, the largest economy in Latin America and second largest in the Western Hemisphere after the United States, is reeling from the near collapse in commodity prices. Although the country remains the seventh largest globally at 1.9 trillion USD (United States Dollar), it is now entering a recession that promises to be long lived. The GDP is expected to shrink by 1.2% this year and even more in 2016. Unemployment is also rising rapidly. It was reported at 7.6% in August nearly 77% higher, than the 4.3% that was recorded last December.

Unfortunately for Brazilians, they have already reelected their current leftist president Dilma Rousseff for a second term as of last October. However, it is increasingly likely that she will be impeached before she finishes her second term in office. The latest scandal is the incumbent government manipulation of fiscal accounts in 2014, that made the President more likely able to win a second term in office. This is added to the charges of corruption in her government in regards to the state owned oil behemoth Petrobas. As the largest energy producer in Brazil, the company has apparently been involved in massive kickbacks that trace back to the present government.220px-Petrobras_horizontal_logo_(international).svg

The Brazilian real has already lost 30% in valuation since last year. Further devaluation is likely to follow, as the country tips further into economic contraction this year and in 2016. It is already the worst recession in 25 years. Tainted by accusations of corruption and incompetence President Rousseff will struggle to hold onto office. Her prescription to deal with the widening deficit is an increase in taxes a hard sell in a rapidly declining economy. The country has received a downgrade in its credit rating last month by Standard & Poor, as a result of the rising fiscal gap in spending.

Santiago Metro is South America's most extensive metro system[

Santiago Metro is South America’s most extensive metro system[

In formerly prosperous Chile, the situation is much the same. Two years after she was re-elected President Michelle Bachelet faces an approval rating of just 20%. As the world’s largest exporter of copper, the Chilean economy has taken a hit from the economic slowdown in China and the world generally. High profile corruption and the sluggish economy will most likely doom her efforts to take the economy further to the left.

President Bachelet was pushing for reforms in the constitution, education, labor and tax collections to deal with what she considers to be the chronic inequality that exists in Chile. As a center left politician the President wanted a new constitution, stronger labor unions, free education at the university level and a new tax system to pay of it all. Her intention is to boost government revenues by 3% of GDP by 2018. A difficult task in a sputtering economy.

Left-leaning leaders of Bolivia, Brazil and Chile at the Union of South American Nations summit in 2008

Left-leaning leaders of Bolivia, Brazil and Chile at the Union of South American Nations summit in 2008

The situation in socialist Venezuela is dire. The GDP will contract an additional 7% if not more this year. The real inflation rate is at 150% and might edge higher. The near absence of foreign exchange despite the wealth previously generated by oil, is making it next to impossible to import needed products. Massive shortages in consumer goods have not been abated, by an ever increasing rationing regime.

Worse yet, the inability to import needed inputs for manufacturing has brought the economy to a virtual standstill. The only answer coming from the central government is a further encroachment of the private sector. It is unclear how long the successor to Hugo Chavez will be able to hold onto power. President Maduro in office since 2013, has no answer but to stay the course. To show the depth of the crisis, the country has stopped publishing regular economic statistics as of last December.

President Maduro of Venezuela

President Maduro of Venezuela

A sovereign debt default is now increasingly likely in cash strapped Venezuela. The present budget deficit is at 24% of GDP and still rising. To continue to function the government has already borrowed the equivalent of $45 billion USD from China. It has also printed tons of money. So much that the domestic currency has practically become worthless.

The economic situation is much the same in the leftist governments in Bolivia under Evo Morales and in Ecuador under Rafael Correa in office since 2006 and 2007 respectively. Outside South America the Dominican Republic, El Salvador, Nicaragua, and Costa Rica are all saddled with governments in varying degrees, that want to continue the tired policies of unaffordable social programs. In the end, it leaves these countries saddled with unsustainable debt and economies that remain uncompetitive in the international arena.

The problem for most of Latin America is the lack of investment in infrastructure and manufacturing during the years of economic expansion. Spending on infrastructure is just 3% of GDP. That is half of what India spends and a third of what China invests. It will be difficult to achieve this now in the present period of readjustment and contraction. The enormous sums spent on imports created a huge splurge in consumer spending, but did little for long term investment and economic sustainability.

UNASUR summit in the Palacio de la Moneda, Santiago de Chile.

UNASUR summit in the Palacio de la Moneda, Santiago de Chile.

The increasing financial difficulties of the region as a whole, makes it unlikely that fiscal stimulus and monetary policy alone will bring the region back to growth and prosperity. The low rate of savings now at just 20% and investment, will prevent a major rise in productivity. This in turn will prevent real wage growth and greater employment opportunities for the growing population of Latin America.

The gloomy economic prospects for the region as a whole, will finally force voters in a number of countries to seek alternatives. It is likely they will be more receptive in permitting national policies that are geared towards growth and investment. One can easily predict a change in governmental policies in the near future, along with a change in leadership in a number of countries across the region.

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