The latest estimates from consensus for the main Latin American economies show a continent facing a lost decade. The region’s GDP growth has been downgraded yet again to a modest 1.1 percent for 2023, with rising inflation and weakening gross fixed investment. Considering that the region was already recovering at a slower pace than other emerging markets, the outlook is exceedingly worrying.
The poor growth and high inflation expectations are even worse when we consider that consensus estimates still consider a tailwind coming from rising commodity prices and more exports due to the China re-opening.
How can a region with such high potential as Latin America be condemned to stagflation? The answer is simple. The rise of populist governments in Colombia, Chile, and Brazil have increased concerns about investor security, property rights, and monetary discipline.
Argentina is expected to post a modest 0.2 percent GDP growth in 2023 with 95 percent inflation and a debt to GDP of 72 percent. Years of monetary and fiscal excesses have destroyed the purchasing power of the local currency and dilapidated the prospect of real growth. In Argentina, poverty has escalated to 36.5 percent of the population, and the government policies are doubling down on interventionism, price controls, and higher taxes with the expected negative results. Despite the tailwind of high demand for soya and cereals globally, Argentina is diving deeper into Venezuelan territory, where consensus expects another year of a weak 3 percent bounce after destroying 80 percent of the output in a decade, with enormous inflation of 132 percent.
The problem? The new governments in Chile and Colombia are announcing policies that resemble those of the “Peronist left” in Argentina, and the Fernandez government in Argentina is looking more like Maduro’s Venezuela each day.
Chile is expected to post no growth in 2023 despite an estimated higher copper price, and 15 percent inflation. Colombia, which showed the strongest recovery from the COVID-19 crisis until 2022, in which consensus expects a 7 percent growth, is feared to stop in its tracks and deliver a poor 1.6 percent GDP growth with elevated inflation, close to 7 percent.
In Brazil, consensus expects a poor 0.9 percent growth with 5 percent inflation. It doesn’t look as bad as Argentina, but the first major announcement of newly elected president Lula has already triggered all alarm bells. Lula stated that he wanted to change the constitution to lift the spending limit and increase government spending even more. The Brazilian currency and 10-year bond reacted aggressively to this risk, because everyone can remember that Lula’s “economic miracle” a decade ago came from massively high oil prices and, when the commodity bonanza ended, his successor Dilma Rousseff sent the country into a deep crisis where spending soared and growth stagnated.
You may say that the rise of populism in Latin America is the consequence of the failed classical liberal policies implemented before, but that would be a grave mistake. Most of these countries haven’t seen open and liberal economies but crony states. Statism failed, and more statism fails even faster.
Global investors see the enormous potential of Latin America. However, when governments start to impose interventionist policies, put at risk property rights with expropriation threats, and at the same time massively increase monetary imbalances by printing currencies with no real global and diminishing local demand, the combination is destructive.
Why do citizens vote for politicians who implement confiscatory and extractive policies? In many economic debates in the Latin American media, one can hear the word “redistribution” repeated incessantly. Many believe that wealth is like a pie that can be cut and distributed at will, but ignore that wealth is either created or destroyed, it doesn’t stay flat.
Interventionist policies destroy wealth in three ways: First, by attacking independent institutions and introducing random political decisions in legal and investor security, which erodes growth potential, investment, and employment. Second, by increasing taxes on the productive sector to pay for massive subsidies paid in a constantly depreciated currency, which creates a double negative of lower growth, weaker local businesses, and a dependent subclass that rarely emerges. The productive sector ends up being forced to operate in the underground economy to avoid confiscatory taxes. Third, interventionism destroys the purchasing power of the local currency by breaking all the rules of prudent monetary policy and financing an ever-increasing government size by printing a constantly devalued currency. The combination of these three factors means poverty and stagnation.
Why do interventionist governments do this when they know—and they do—it doesn’t work?
Monetary destruction is the easiest and most effective way of nationalizing an economy. Printing currency is a form of expropriation of wealth, as money creation is never neutral—it benefits the government and hurts real wages and savers.
Why would “populist” governments impose policies that perpetuate poverty and hurt the people? Interventionism doesn’t aim to increase prosperity but take full control of a nation. The three mentioned policies are aimed at grasping full control of a country and making the population dependent, not delivering growth and improving social conditions.
Extractive and confiscatory policies aren’t social measures, they’re profoundly anti-social. The worst thing is that once implemented, they become difficult to unwind. We should learn the lesson everywhere because it’s coming to your country soon.
