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Roberto Laserna: Latin America’s Populist Cycles

Roberto Laserna: Latin America’s Populist Cycles

Posted by Juan Gavasa on August 06, 2014

Populism in Latin America is at a low point. But, though mounting economic problems facing Venezuela and Argentina might presage a return to market-based economic policies in the short term, this will not end the familiar cycle of populism, profligacy, pain, and pragmatism that has long characterized the region.

Populist parties’ rise to power in recent decades benefited from soaring commodity prices, which generated an export windfall that allowed political leaders to spend generously on the poor. However, with prices now softening, revenues can no longer cover the social subsidies that have underpinned populist rule. Furthermore, ineptitude and corruption in redistributing wealth have become more apparent as the region’s economies deteriorate, weakening governments’ legitimacy.

A populist regime can function over the long run only if there are sustainable funds on which to draw. (It also helps when the ruling party has a powerful enough mandate to run roughshod over the rule of law and minority rights.) Simply put, populists seldom build a healthy economy. Instead, they tend to plunder the productive sectors, and when the money is gone, they are either devoured by the crises they created or forced to change course to survive.

Argentina provides a valuable example. Periods of failed populism – featuring state controls over prices, exchange rates, and businesses to redistribute wealth – have been followed by economic reform and liberalization (often by the very same ruling Peronist party). But memories of easy money and frustrated expectations tend to leave voters susceptible to new spending promises. As soon as the economic crisis recedes, the populist cycle begins again.

The Argentine and Venezuelan governments are at similar points in this cycle. Their popularity – resulting largely from substantial income transfers to the poor – is now waning, at a time when severe budgetary pressures rule out further large-scale spending.

Indeed, Argentina recently faced a particularly acute dilemma, following a United States court ruling requiring it to repay $1.3 billion to US hedge funds that rejected an earlier sovereign-debt rescheduling deal. Argentina’s president, Cristina Fernández de Kirchner, was forced to choose between digging into the country’s dwindling reserves or defaulting on all loans – resulting, most likely, in international isolation and a new financial crisis.

Fernández chose the latter, which will only serve to deepen her unpopularity. Her absence from Argentina’s World Cup final match against Germany was not surprising; boos directed at her by the Argentine fans would have been the tournament’s only certainty.

Venezuela’s economic position is also dire. Essential goods are in short supply. President Nicolás Maduro is at a loss to deal with growing political and social discontent, as street protests, which have already claimed 43 lives, continue. For the first time since Hugo Chávez assumed power almost two decades ago, Chavista officials are battling out their differences in public.

Like most states that depend on non-renewable resources, Venezuela tends to suffer deeper crises. These countries’ subsequent liberalization is usually limited to the few wealth-generating sectors. In this way, populist politicians can retain some economic control while negotiating with investors for new funds. But this approach makes a crisis harder to handle when it finally arrives.

Similar problems are apparent, if less pronounced, in Ecuador and Bolivia under their respective presidents, Rafael Correa and Evo Morales. Both administrations have pursued some pragmatic policies. Market competition is tolerated among small entrepreneurs. Ecuador’s use of the US dollar provides some monetary discipline, and obliges the government to maintain a more open economy.

Likewise, Bolivia’s automatic allocation of a fixed portion of tax revenue to local government has created a de facto stabilization fund, while cash bond payments to senior citizens have spread some of the wealth. These measures, initiated prior to Morales’s election, have reduced the temptation for further economic meddling.

But, though the Ecuadoran and Bolivian economies are growing, the more productive sectors that would support sustainable expansion are not. Indeed, both countries have become more exposed to global economic volatility, despite their leaders’ vows to reduce dependence on the global capitalist order.

The extent of a country’s natural wealth determines the degree and duration of support for populist policies. The crisis for populist governments arises when those vital resources are depleted or demand for them falls. Either way, as the resources boom diminishes, populist regimes lose their legitimacy, because voters still expect to receive handouts.

But the underlying dynamic will not disappear overnight, and no one should be fooled by waning support for populist governments in Argentina and Venezuela. As new political and economic challenges emerge at home and abroad, the populist cycle may well begin again.

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