3 minute read
Economic Policies
DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle
Interventionism Hurts Latin America
The latest estimates from consensus for the main Latin American economies show a continent facing a lost decade. The region’s gross domestic product (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 reopening.
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 has 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 ratio 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 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 Alberto Fernández government in Argentina is looking more like Nicolás 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 of 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 Luiz Inácio Lula da Silva has already triggered all alarm bells. Lula said he wanted to change the constitution to lift the spending limit and increase government spending even more. The Brazilian currency and 10year 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 in which spending soared and growth stagnated.
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.
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 to take full control of a nation.
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.
