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Latin America: the times, they are changing

Economic Report


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  • Anti-establishment sentiment is growing in Latin America, just like elsewhere in the world
  • But, unlike the rest of the world, the region has reduced inequality in the past 15 years
  • In Latin America, the driver of discontent is a growing and increasingly vocal middle class
  • There is an increasing risk of political turbulence around the many elections in 2017 and 2018, but that should subside afterwards
  • Recent corruption scandals reflect a strengthening of institutions
  • Latin America continues to shift away from populism and policy is becoming more constructive
Figure 1: Moderate changes in political risk in Latin America
Figure 1: Moderate changes in political risk in Latin AmericaSource: IHS

Political developments have dominated the news worldwide in the past year, rendering the world more uncertain. While political risk has traditionally been of greater importance in emerging markets, political risk has risen in industrialized countries as well more recently. Higher political risk is usually detrimental for economic activity, feeding through into confidence and risk premiums. Latin America has also had its share in the spate of political news. On average, political risk has been edging higher between 16Q3 and 17Q3 (Figure 1), in line with the expectations we had last year (see Latin America: Turning the populist page). However, in comparison to earlier years, the changes in political risk are on average lower and are more evenly distributed amongst increases and decreases, which seems to point towards some stabilization in the region.

Growing anti-establishment sentiment

The worldwide political noise in the past year has been dominated by the rise of populism in many developed countries on the back of the population being disenchanted with the political class and growing income inequality is often quoted as an important factor. Anti-establishment sentiment is growing in Latin America as well, but the dynamics and the shift in political preferences are different here.

The increase in popular discontent has become increasingly visible in recent years, as illustrated by falling government approval ratings. Leaders of Brazil, Mexico, Colombia and Chile struggled with historically low and decreasing approval rates in 2017. Approval rates have been somewhat better (above 50%) though also declining in countries that have recently held elections, such as Argentina, Ecuador and Peru. Latin American citizens are not only disenchanted with their governments, but with the political class in general. The Latinobarometro survey of 2016 indicates a loss in confidence in most institutions and political parties enjoyed the lowest confidence (17%, compared to an average of 22% in the period 1995-2016). Moreover, in most countries less than a fifth of respondents believed that the government ruled in the best interest of the entire population. This percentage is particularly low in Brazil (9%), Chile and Paraguay (10%), though not surprising for the most unequal continent in the world. This reflects widespread anti-establishment sentiment that makes for an environment relatively prone to radical political elements and social unrest. In the past year, the increasing dissatisfaction has translated to a higher risk of protests and riots (Figure 2).

Figure 2: Risk of protests and riots has increased across the board
Figure 2: Risk of protests and riots has increased across the boardSource: IHS
Figure 3: Trust in the government to act in the best interest of all population groups
Figure 3: Trust in the government to act in the best interest of all population groupsSource: Latinobarometro

While the rest of the world has seen populism rise on the back of inequality, Latin America has been bucking this trend by actually reducing inequality between 2003 and 2013. (see Latin America: progress through populist policies? A mixed picture ). The economic windfall from the commodity super-cycle (2003-2011) has helped reduce poverty and led to the formation of a middle class whose share in the population exceeded that of the poor for the first time in history in 2010. The decrease in inequality has continued after 2011, even though the reduction in poverty and the increase in the middle class have slowed down and even stagnated in 2015. At this time, the poverty rate was 24% and the middle class accounted for 35% of the population. Against a backdrop of poor public service delivery, poor economic performance and fiscal consolidation in recent years, the middle class has become increasingly demanding and vocal, while increased access to social media provides the channels for expressing frustration and coordinating action, which seems to have had a catalyst role. A clear example of the increasingly vocal middle class were the protests triggered by an attempt to amend the constitution to allow for a second presidential term in Paraguay in April 2017.

Corruption scandals all over the region

Corruption has moved to the forefront of political events in Latin America, as corruption scandals have dominated the news in recent years. This has also contributed to the pick- up in discontent and the disconnection of the public with the political class. The most well- known scandal is the Lava Jato (Car Wash) corruption scandal in Brazil, which involved high ranking politicians and the business elite, and has had a significant economic impact. It has also led to historic events in Brazil, such as the sentencing to prison of former Brazilian president Lula de Silva and charges against ruling president Temer in 2017. The scandal has also reverberated throughout the region, as investigations transpired the involvement of (former) officials in nine countries in Latin America (half of continental Latin America), namely: Argentina (links to previous government), Colombia, Ecuador, Guatemala, Mexico, Peru and Venezuela.

In 2015 we had observed that the region scored close to the global average on institutional quality, but lagged behind on the rule of law and control of corruption. Hence, the fact that corruption is endemic is not new, as also reflected by the history of the Corruption Perception Index (Table 2). Therefore, the increase in corruption allegations in the region rather reflects a strengthening of the judicial institutions. Impunity seems to be tackled in Brazil as well, given the imprisonment of high ranking business men and politicians. If impunity is reduced well, that will boost the quality of institutions and, thus, economic growth potential in the long term. In the short term, however, the corruption scandals create a political vacuum that can lead to political uncertainty around elections. Given the high number of polls slated for 2017-2018, political turbulence is likely to persist during this time horizon. On the bright side, as elections provide a channel for expressing discontent, the risk of social upheaval is likely to subside. Particularly so as economic activity including purchasing power are expected to improve (see chapter 1).

Table 1. Endemic corruption remains a problem in Latin America (score on the Corruption Perception Index)
Table 1. Endemic corruption remains a problem in Latin America (score on the Corruption Perception Index)Source: Transparency international Remarks: Countries scoring 50% or lower are regarded as ineffective in controlling corruption; Transparency International changed the methodology and scale from 0-10 to 0-100 in 2012.
Table 2: Elections calendar
Table 2: Elections calendarSource: Election guide, IHS

Don’t let a good crisis go to waste

Latin America has not only bucked the trend by reducing inequality, but also by shifting away from populism. This development had already started in late 2015, as populism started to lose its shine in the region on the back of the economic deterioration it has caused in countries like Argentina and Venezuela (also see box on Venezuela). In recent years, elections have led to more pro-business governments in Argentina and Peru. Consequently, the economic policy direction there has become more sound and constructive. Even in the case of incumbent victory, such as in Ecuador, the populist tone has softened (though the political dynamics remain contentious here). The resolution of the FARC conflict in Colombia can also be seen as a sign of reduced support for populism. In other countries, such as Brazil and Mexico, the reform drive has been triggered by the need to improve economic performance ahead of upcoming elections (in Brazil also worsened by a political crisis) and address the deterioration in public finance. The perspective of elections in the foreseeable future hasn’t had a positive effect on policy everywhere. In Chile and Colombia the presidents enjoy little political leeway, so little progress is expected in the meantime. On a more positive note, progress has been booked on the strengthening of macroeconomic institutions, as the need to tackle high inflation in the past years has allowed central banks to reassert their independence (e.g. Argentina, Brazil, Chile, Colombia, Peru).

To the 'Latin America: the dawn of new beginnings' overview page

Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2326 6856

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