Riddled with corruption and plagued by bureaucratic sloth, Brazil’s federal government (like many in Latin America) is a dysfunctional mockery of its original design. The society of samba and soccer is exceedingly tolerant of bad government but two years of negative growth (2014 & 2015), unprecedented in 80 years, drove an angry middle class to the street demanding impeachment of their president and the indictment of an unscrupulous elite. In the House of Cards-style power struggle that led to Temer’s presidency, financial markets also played a role. Each time the corruption-busting judiciary gained the upper hand or Brazil’s political opposition mustered some unity and fortitude, the Bovespa index soared. When Dilma and Lula muffled the voice of sedition with their own constitutional shenanigans, Brazilian stock and bond prices nose-dived. Brazilian leaders are befuddled and frustrated by the disproportionate influence that organized public protests and financial traders—two unelected players—wield on policy today.
Impacting Elections in Venezuela
Brazil may have dominated the spotlight of late, but they were not alone. In the December 2015 mid-term elections, Venezuelan generals defied the orders of government and refused to interfere with the logistics of collecting and counting votes. The generals feared that the army would be filmed disrupting democracy, further tarnishing their fragile image. The Venezuelan opposition won a super-majority in the unicameral congress, setting up a constitutional stalemate between the executive and judiciary on one side of the battle line versus the congressional majority, supported by a fed-up public and a return seeking posse of PDVSA and “Vene” bond traders. With reserves running dry, the Maduro administration is finally reforming its perverted exchange controls, albeit inadequately.
Rolling Back Robin Hood in Argentina
In Argentina, President Macri’s blitzkrieg assault on the legacy of economically toxic policies that he inherited from the Kirchners has been met thus far with relatively feeble objections, in part because investors applaud the reforms with open pocket books. Argentina is no longer a pariah among international investors and financial and strategic investment commitments to the country continue to grow – albeit not as quickly as some would hope. While the Kirchners were able to manipulate populist mobs into supporting short-sighted Robin-hood like economic policy in the face of an angry market, Macri has appeased the market, cajoling billions into the country, helping to quiet Argentina’s vociferous unions and street protesters.
An Unlikely Yet Powerful Pairing
Normally, the objectives of street protesters (who want change) collide with those of the market (which rewards growth and consistency). In fact, they sometimes cancel one another out. However, when they stand on the same side of a political impasse, the market and street make a foreboding pair that can challenge any government in Latin America. The power of these two unelected groups is further augmented by two key factors: the collapse in commodity prices and digital communications.
Investors Regain a Voice in the Region
Governments in Venezuela, Ecuador, Bolivia and Argentina all share in common a sudden slide in tax revenue from commodity related royalties and profits. During the commodity super-cycle, these governments mollified public angst by providing subsidies (cheap gasoline, electricity, transportation services, some foodstuffs). With billions of dollars earned by selling natural resources, governments ignored the pleas of investors for greater transparency and legal protection as well as their eventual capital flight.
However, the halting of mining and energy projects and general slowdown of foreign and domestic investment has brought upon these governments and others a fiscal crisis. Three years ago, the Correa administration practically ran its largest investor, Kinross mines, out of Ecuador. In March 2016, the Ecuadorian mining secretary attended the world’s largest mining conference in Toronto, promising world-class investor protection and regulatory transparency to new investors. Suddenly investors have a voice again in Latin America and those who have not abandoned the region, are being heard again by governments and opposition in Buenos Aires, Santiago, Lima, Bogota, and even Brasilia. Gone is the notion of Latin America’s “3rd way” brand of politics, where populist socialism can somehow coexist with a robust private sector. The fact is that natural resource investors put up with all the anti-capitalist rhetoric and demonization as long as they were earning record profits but as soon as those profits disappeared, they become far more selective about where they invest. Now Latin American governments want them back.
Social Media Supercharges Social Protests
Latin America has a rich history of public dissent. Its own revolutions and independence battles lionized a generation of national heroes. The region’s own brand of cold-war politics mingled with a 1960s generational divide created fearless academic and union leaders who now govern some of the region’s economies. But today’s public protests are supercharged by social media, which helps organizers move at lightning speed, marshalling mobs of millions in a few days, as street protests in Brazil revealed. The speed and transparency of social media also helps dissuade any sane government from trying to squelch dissent. When protests break out in 30 cities at once, no government can hope to stop them by force.
The Power of Digital Proof
Even before any protest is organized, governments are held accountable to a higher and more vigorous standard thanks to the fact that the public is armed with recording devices in the form of a smartphone. When the Morales administration in Bolivia attempted to manipulate results of the 2015 referendum that was to decide his ability to run for a fourth term, the senior ministers issuing orders of electoral interference were recorded by bureaucrats whose consciences were tested and released by Twitter and Facebook to voters who turned down Evo’s attempt at a fourth term. The journalistic-style investigation of his 26 year-old mistress’ unlikely rise to become CEO of a Chinese-backed Bolivian firm that consistently won uncontested public bids was another strike against him when the evidence went viral.
A New Opportunity?
We are finally coming to terms with the overwhelming level of corruption and incompetence that went unchecked or casually ignored in Latin America during its decade of plenty. One can easily grow despondent reading today’s headlines but history shows that each embarrassing political truth brings a positive change in behavior and in some cases the opportunity to “throw the bums out” and usher in a new brand of more able and transparent leadership, as appears to be the case in Argentina. One cannot help but be encouraged by the fearlessness of Brazil’s young federal prosecutors who have indicted dozens of corrupt officials and private sector leaders, including those most believed were too mighty to fall. Driving these changes are two unlikely partners: a well and rapidly informed public and a pragmatic financial market which bets on the side of better governance. Together they are sending an unequivocal message to Latin America’s elite: “Be on your best behavior or we will strip you of the two things you hold most dear, money and popularity.”
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