Latin America’s Pink Wave Faces Investor Skepticism

A pink wave of leftist governments has swept across Latin America. In recent years, first Mexico, then Argentina, Peru, Chile and Colombia and finally Brazil, have all elected governments with ambitious social agendas and plans for bringing back the state as the agent of economic development. Unfortunately for them, investors, both local and foreign, are not sticking around to see how this will work out.

The left in Latin America has a dismal record with its style of developmental activism centered around state companies, private firm “champions” and protectionism. Recent experience with Peronist Argentina, Bolivarian Venezuela and Brazil’s PT party have ended in economic collapse, inflation, currency devaluation, soaring debt and increased misery. The result has been a decade of severe capital and human flight.

The return of Lula and his PT party to power in Brazil promises more of the same big plans for state-led growth promoted by government agencies, state companies and public banks. It doesn’t matter that these policies previously ended in enormous losses caused by mismanagement and rampant corruption.

Unlike a decade ago, when Latin America’s left was going against the neoliberalism of the Washington Consensus, today state activism is back in favor in Western capitals. Partially as a response to Chinese policies but also because of a new concern for the many domestic losers of globalization, the Biden Administration has pushed through the country’s biggest-ever piece of climate legislation (The Inflation Reduction Act) which will provide lucrative tax incentives to companies that develop mines, processing facilities, battery plants and EV factories in the US. In addition, with bipartisan support, new laws have been passed to promote infrastructure and semiconductor investments. Moreover, these new programs now have strong intellectual support from academicians (Mariana Mazzucato and Carlota Perez are prominent examples) who argue that history points to the importance of government policies to induce investment, particularly at times of enormous technological disruption like the ones we are now living.

Chile’s president Gabriel Boric has sought the counsel of Carlota Perez, a Venezuelan economist who studies the interplay of long-term technology and financial cycles,  to understand how Chile fits into the current process of global technological transformation engendered by the Information and Telecommunications Technology (ICT) revolution. According to Perez, Latin America has been a major loser of this technology cycle which has crippled the mass production “Fordism” model (manufacturing jobs that pay enough for a worker to acquire middle class consumer goods) that was the foundation of the post WW II Latin American modern economy. These jobs have been destroyed across South America and replaced by low-pay/low-skills service jobs. Nevertheless, Perez actually sees a brighter future, as we have now entered the period of massive diffusion of ICT technologies, a “golden age of full deployment.” During the second half of long technology cycles, typically the productive sector replaces the financial sector as the driver of the economy. Perez sees a vital role for the state at this stage of the cycle to “tilt the playing field” through public policies (credit, taxes, subsidies, etc…) to support productive activities and “smart, green, healthy global growth.” She recommends that a country like Chile  promote  ICT diffusion by inducing investments into socially critical areas (e.g., the democratization of access to education and information) and into priority frontier industries (e.g., alternative energy technologies and supply chains).  Perez argues that those countries with political dynamics that allow for proactive public policies will  have a big advantage in coming years. Without these policies, ICT investments have primarily financed “escapist undertakings” such as computer games, social networks, parallel universes and delivery services for the rich, Perez says.

In line with the ideological shift towards state activism, Brazil’s Andre Lara Resende, a MIT trained economist who has joined president-elect Lula’s economic transition team, argues in favor of “alternative policies of public investment” to kick-start capital deployment in infrastructure, decarbonization, electrification and industrial revitalization. According to Lara Resende, these investments are productive and profitable and would  boost economic activity , and, therefore, would have a positive impact on fiscal accounts. His rationale relies on a proposed radical change in Brazil’s monetary policy from the current Fed-centric model to an independent one based on ‘’Modern Monetary Theory,” which assumes that public debt does not matter as long as rates are below nominal GDP growth.  Lara Resende would achieve this through financial repression (artificially low interest rates and directed lending), at the expense of what he sees as an over-sized financial sector divorced from the productive sector of the economy and at the service of the rentier class.

Though Lara Resende doesn’t say this, the logical consequence of his plan is a return to the strict capital controls that Brazil had until the 1990s. Of course, investors will try to anticipate this change. Boric faces the same issue in Chile which as seen huge levels of capital flight in expectation of structural changes to economic policy.

The president of Brazil’s Bradesco, Bank, Octavio de Lazari, this week warned president-elect, Lula that, given “an extremely challenging” 2023, there is no room for “tests and experiments,” and he suggested the government focus on reducing inflation and controlling fiscal deficits. From within Lula’s economic transition team, the sole orthodox member, the economist Persio Arida, echoed these thoughts, advising his colleagues to stick to the basic objectives —  ‘Opening the economy, making the state more efficient and reforming the tax system” — which have been pursued by  Brazilian economic policy makers, unsuccessfully, for the past 40 years.

Latin America faces a stark dilemma. The neoliberal polices of the Washington Consensus are deeply out of favor and blamed for currents ills, and the rich countries are moving away from these policies and are increasingly prone to fiscal and monetary experimentation and state activism. This could in theory provide an opening for policy changes in Latin America. However, investors believe that today’s Latin American states do not have the ability to implement state-led growth without the corruption and incompetence of the past. In a world of free capital flows, investors will prefer to move  their capital outside the country rather then risk it at home.