Left Turn in Latin America

January 2006 Alex Black

At the end of last year’s July article on development assistance to Africa, we wrote that events in Latin America, particularly in Bolivia, would be of keen interest to the observer of international affairs. We were not disappointed; however we did not go so far as predicting the trifecta of left-wing governments that have been grabbing headlines in Latin America with Bolivia’s newly elected Evo Morales visiting first Cuba’s Fidel Castro and then Venezuela’s Hugo Chavez in December. With a string of elections due for 2006, Washington has much to worry about in Latin America.

Evo Morales, at the head of Bolivia’s Movimiento al Socialismo (MAS) has moved steadily and surely to the top of Bolivian politics, culminating in his capturing the presidency with a resounding 54 percent of the vote, the largest showing of support for any candidate since the restoration of democracy in the 80s. He is of Aymaran decent (Bolivia’s second largest ethnic group, after the Quechua), making him the country’s first indigenous head of state. Much of his popular appeal comes from identifying with — and mobilizing — Bolivia’s long-suffering indigenous majority.

Mr. Morales was the head of Bolivia’s cocaleros (coca farmers movement) and this issue, in particular, highlights many of the problems facing the country. Mr. Morales once called himself, “the US’s worst nightmare” and he was probably thinking about the US reaction to his views on decriminalizing and reenergizing coca production. Much of the US ‘war on drugs’ is concentrated on trying to eradicate the cultivation of the coca plant by means of chemical spraying and the training and outfitting of government troops. Plan Dignity (as it was called in Bolivia), although successful in reducing coca, devastated the local economies in some of the poorest regions of Bolivia’s Altiplano (such as Chapare, where Mr. Morales is from and where coca is traditionally grown). It is important to remember that coca constitutes an important part of the culture of the indigenous peoples who chew unprocessed coca leaves (which produces an effect no stronger than that of a cup of coffee) while carrying out their grueling subsistence agriculture at high altitudes, a practice that has existed for over 1000 years. More importantly, though, the popular revolt against the US anti-drug policy is testament to the failure to find any sustainable alternative to growing coca and typifies the neglect and indifference that many in Bolivia associate with their dealings with the US.

Moving away from the controversial coca issue, Mr. Morales’ economic plans for the country are equally uncertain. Ideologically, he is opposed to American neo-liberalism — what many in Latin America see as modern imperialism manifested through free-trade agreements and multinational corporations. Bolivia’s recent past has seen a series of spectacular public uprisings against forced privatizations of public utilities, namely the water and gas industries. These privatizations were part of comprehensive economic programs distributed through the International Monetary Fund (IMF) and World Bank organizations aiming at the traditional goals of economic liberalization and fiscal probity. Many in Latin America are growing increasingly skeptical, if not downright antagonistic, toward such international financial institutions, and not without good reason. With near-feudal resource disparities and government corruption to boot, the majority in Latin America’s poorest countries has gained nothing from free-market capitalism. To make matters worse, the haves and the have-nots are often divided along ethnic lines, with the white minority (which in Bolivia constitutes some 3 percent) controlling virtually all economic and political activity. When Mr. Morales claims that the indigenous population has been discriminated and marginalized for over 500 years, he is evocating much more than the failure of American neo-liberalism.

So what will the Morales government do? Bolivia is Latin America’s poorest country and one with a rich history of anti-government riots, so he will certainly have to tread carefully if he is to maintain his popularity. Calls for unity and belief in the power of the people might prove specious if Mr. Morales can’t engineer some improvement in the standard of living. Ambitious social programs will undoubtedly be undertaken but will not be easily affordable — especially as the US will be loath to keep pouring in the aid money. The most likely recourse would be to nationalize and exploit the country’s natural resources but ultimately this is hardly a long-term, economically viable solution. Mr. Morales has already turned to Venezuela’s Hugo Chavez and Petroleos de Venezuela SA to help in developing its natural gas reserves. Indeed, its seems that Venezuela’s example holds many answers for Bolivia’s burgeoning socialism even if they don’t have comparable energy resources. But has the ambitious Chavista model worked even in Venezuela?

If nothing else, Mr. Chavez is certainly both bold and busy. In OPEC, he is a price hawk calling for strict adherence to quota limits and price increases. He has increased the repatriation of oil funds through Petroleos de Venezuela’s subsidiary Citgo and has broadened his oil relationships with not only locals Brazil and Argentina but also with China and India. He advocates against the American ‘Free Trade Area of the Americas’ initiative and has openly accused Mexico of being America’s economic lapdog on this issue. Instead, he fosters intra-Latin American relationships and has started a multitude of organizations (PetroCaribe, Telesur, Petrosur) and has arranged barter deals with Cuba (oil for expertise) and Argentina (oil for food). He is not so much anti-American as anti the American government, and in his role as Robin Hood, Venezuela was the first foreign government to offer aid to the US following Hurricane Katrina in the form of water, food, and, not surprisingly, oil. Furthermore Mr. Chavez signed a deal with Massachusetts to sell heating oil through Citgo to low-income families at a 40 percent discount.

Internally, he has increased the government’s commitment to social programs, largely at the expense of the private sector. Unemployment is still high, at over 11 percent, and GDP per capita growth over the last 5 years has been flat. Oil production has stagnated and maybe even faltered slightly. Since Mr. Chavez’ programs both at home and abroad depend exclusively on oil windfalls, this makes them extremely vulnerable to price volatility. Most alarmingly, the same grassroots movements that ushered him into power seem by most unbiased accounts to be falling by the wayside and many fear that democracy is slowly evaporating, as is typical in many an oil state.

What can we expect from the rest of Latin America? Must we worry about a cascading domino effect of left-leaning, anti-American democracies? In Peru, pro-US president Alejandro Toledo, whose government has been racked with fraud and scandal, has one of the lowest approval ratings anywhere, despite steady 4 percent GDP growth since his election in 2000, which is at least positive. Peru’s election in April will be hotly contested with no clear favorite at this time (Peru has a history of electing unknown wild-cards). To add extra spice to the mix, Mr. Fujimori is back and even if he is in a Chilean jail, his presence might stir up deep-seated conflicts and anxieties.

In July, Mexico will probably elect the left-leaning Mexico City mayor Andres Obrador. There is some concern as to whether he will be ‘a Chavez or a Lula’ but we find little reason to expect him to adopt radical economic policies. Mexico is closely tied to the US and as one of Latin America’s largest economies, has much to gain economically by being open market and pro private enterprise. This is not to say that Mr. Obrador will be content with the status quo. He will likely institute vast social programs (he spent $6 billion on them in Mexico City) in an effort to alleviate poverty and reduce the flagrant income disparities that exist in the country (this might work to stem the flow of migrants to the US which Mr. Obrador regards as a
travesty). A more left-leaning Mexico might attempt a rapprochement with Venezuela and develop closer ties to Latin America, although this might further scuttle the plan for a Free Trade Area of the Americas.

Both Ecuador and Brazil face elections in October. Ecuador could venture slightly further left and elect Leon Roldos Aguilera, who is currently slightly ahead in the polls. He is not expected to be nearly as controversial as his neighbor, Evo Morales, even though his country faces many of same problems as Bolivia. In Brazil, Lula will probably be reelected despite his government seemingly doing everything in its power to deny its legitimacy through corruption. The alternative is Sao Paulo mayor Jose Serra, a more centrist politician whom Lula beat the last time around. Mr. Lula has practiced what many economists see as a financially responsible populism: advocating social programs without falling into a fiscal trap. A new mandate would mean that Mr. Lula would be free to advance his ambitious and necessary social reforms. Mr. Lula has also managed to position Brazil well internationally: both Venezuela and the US cite him as an ally, giving Brazil an enviable position with enough clout to be courted by both sides. Mexico would be wise to follow a similar path, and if Mr. Obrador wins Mexico will already be aligned closer to Brazil’s geopolitical alignment than it currently is.

Anti-American sentiment in Latin America is at an all-time high and we would not be surprised if either Peru and/or Ecuador follow a more left-wing, anti-American path. We don’t expect anything radical from either Mexico or Brazil since, as the region’s economic lodestones, much of Latin America’s overall prosperity depends on their continued economic development and social stability. The rise of strong intra-regional economic alliances is certainly positive and we can look for these to increasingly exclude the influence of the World Bank, the IMF, and ultimately the US. Whether Latin America is able to sustain and expand its economic growth and political stability depends on a cautious mix between social reforms and profitable resource extraction. Even if the US influence on the region is waning, the influence of commodity prices is perhaps increasing for those, like Venezuela, who are either unwilling or unable to stomach strong economic medicine.

With Latin America poised to continue its left turn with the upcoming Mexican elections, Interinvest will continue to monitor the political developments in the region. Investment opportunities would also be strongly influenced by commodity prices and the stability and appetite of capital markets, particularly those in Brazil and Mexico.