Britain’s exit from the European Union and Donald Trump’s candidacy for the U.S. presidency have dominated the media for some time now, with much of the coverage focusing on domestic and European Union impacts. While Brexit is a certainty, the popularity of Donald Trump, even should he not be elected president, may well usher in an era of greater U.S. isolation—Hillary Clinton has recently backed off from her earlier unconditional support for the TPP trade agreement. Only a handful of reports have explored the economic implications of these events for Latin America. Even fewer have explored the potential political fallout.
Brexit and Trump: New Economic Challenges
Most observers agree that Brexit will have an immediate negative economic impact on Latin America. Insofar as Brexit will produce a global economic downturn, the demand for Latin America’s commodity exports (upon which so many countries are heavily dependent for foreign exchange earnings), will decline. This will exacerbate the economic slowdown that the region has been facing for the last four years—one that has given rise to growing political turmoil, as political power has shifted to the right. Meanwhile, the quest for trade deals with the EU will likely be placed on hold since its members will have much more pressing concerns than negotiating agreements with Latin American countries. Mercosur, the trading block led by Argentina and Brazil, has struggled for such a deal since the late 1990s.
While Brexit will create difficulties for the region, the spectre of a Trump presidency would have calamitous implications, particularly for those countries, particularly Mexico, which are economically integrated with the American economy. Trump’s promise to build a wall along the Mexican/U.S. border, deport Latin Americans without legal status, and renegotiate NAFTA, are all measures that will push the Mexican economy, which has been doing poorly under current PRI president Enrique Peña Nieto, into a deep recession and worsen already serious social problems.
The Political Fallout: Back to the Future?
The political fallout in the short to immediate term in the region will very likely be tumultuous. In a peculiar twist of fate, at the very juncture at which the U.S. and Europe are becoming more isolationist, Latin America has been experiencing a shift to the political right with the rise to power of business-orientated free traders. Among the most notable examples are the election of Mauricio Macri in Argentina, the rise of Michel Temer to the presidency of Brazil with the initiation of impeachment proceedings against Dilma Rousseff, the victory of the right in congressional elections in Venezuela, and the election of former Wall Street financier, Pedro Pablo Kuczynski to the Presidency of Peru. In the face of growing economic difficulties, virtually all of these leaders have promised to spur economic growth through promoting expanded trade opportunities—promises that now face serious obstacles. As the promised economic growth fails to materialize, we can expect rising political unrest and, possibly, a move back to the political left.
As I noted in an earlier blog entry, in most cases the rise of the political right in Latin America has occurred in response to fears of downward mobility, particularly on the part of those who recently escaped poverty. Weakening commodity prices, declines and threatened declines in government spending in social programs, health and education, and corruption scandals, all provided opportunities for opposition right political forces to gain power. If economic growth does not resume, another major political shift is a distinct possibility. The key question, however, is what the centre/left political forces will stand for. Some observers have expressed fears that Latin America, too, will see an upsurge of demagoguery, isolationism and protectionism and will descend into the inward policies of the 1950s to the 1970s. This perspective ignores some of the changes, both international and domestic evident over the last decade. It also ignores the distinct possibility that the new context may give impetus to positive and creative changes in the region.
New Challenges, New Possibilities
Although Latin American countries have admittedly faced difficulties in reverting to lower levels of public expenditure following the 2008 economic crisis, up until that point, left regimes behaved in fiscally responsible ways, often achieving fiscal surpluses. Countries no longer engaged in profligate borrowing and spending of the populist regimes of past. In addition, left/centre regimes valued expansion in international trade and pursued trade agreements throughout their time in power. At the same time, there has been an erosion of the blind faith in magic of the marketplace so evident among business leaders and policy reformers during the heyday of market liberalization in the 1980s and 1990s. Right leaders and parties have come to support social safety nets, although of the more targeted variety. Industrial policy is now on the agenda in a number of Latin American countries. Even though the most powerful business interests have usually not endorsed these programs, in some case they have. Finally, Latin America is not plagued with an immigration issue that can divert attention away from pressing needs for economic growth, employment generation, and social protection.
There is no indication that Latin American leaders are likely to react in a xenophobic fashion to developments in the U.S. and Europe. One of the region’s most notable left wing political leaders, Andrés Manuel López Obrador, presidential candidate for the 2018 Mexican election, speaking in response to Donald Trump’s proposal to build a wall to stem the flow of Mexican migrants, gave a very measured and sensible response. He said that if elected he will pursue co-operation with the U.S, and will pursue policies to stimulate employment in Mexico to reduce the incentive Mexicans to migrate.
The reduction of trade opportunities in Europe and the U.S. combined with the current slowdown in economic growth may provide the necessary incentive for Latin American countries to pursue the development of domestic and regional markets. In a world of growing regional integration, Latin America stands out for the absence of successful regional trade and investment agreements. In addition, the current economic malaise may give impetus to more vigorous and successful industrial policy—a package of policies involving measures to secure greater economic integration and increased investment in research and development--geared to develop products for regional and, eventually, international markets. Employment expansion and improved living standards would follow. While the short to immediate turn certainly presents sizeable difficulties for the region, it may usher in such new possibilities over the longer term.