Challenges to Inclusive Development in Latin America


    With the decline in commodity prices, Latin America faces the possibility of a downward political and economic cycle. During the last fifteen years, as the region has enjoyed economic prosperity with the rise of commodity prices on the international market, left/centre governments spent liberally on the expansion of social policy initiatives. These measures spread the wealth among all socio-economic groups in ways that have not occurred in the past. Poverty declined and there has even been a reduction in the region’s high level of inequality. However, these countries now faces a new critical juncture as left/centre governments face corruption scandals, loss of political power, widespread protests, and the rise of the political right. The commodity boom papered over both institutional inadequacies and hard redistributive decisions. Governments spread the wealth but did not substantially redistribute it, ensuring that middle and upper classes retained an inordinate share of state largesse. Faced with economic downturns and declining state revenues, governments will now have to make hard decisions about the allocation of diminishing state resources. This reality is already giving rise to an increased level of political polarization and contestation, a development that, in combination with the economic downturn itself, may worsen prospects for continued progress toward social inclusion.

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     With the achievement of electoral democracy by late 1980s, observers held out hope that the cycles of authoritarian and electoral democracy, which had characterized the region for much of the twentieth century, had finally ended. From 2004 to 2013, high commodity prices, for such products as petroleum, soya beans, and copper, ushered in a period of economic prosperity and political stability and the election of left/centre governments promising to address the chronic social challenges of the region. Latin America seemed to have entered a golden age of democratic stability, steady reduction in poverty, and—finally—a decline in its traditionally high levels of inequality. According to the Economic Commission for Latin America and the Caribbean, between 2005 and 2012 the incidence of multidimensional poverty decreased in Latin America to 28% from 39% of the population. Dramatic increases in social spending were the main ingredient behind this achievement. Between 2005 and 2012, public spending on social policies increased at double the rate of economic growth in the region increasing from 14 percent of the regional economy to an unprecedented 19 percent.

    In recent years, however, Latin America has experienced the devastating impact of declining commodity prices. Economic growth has been absent or stagnant, unemployment has risen, and incomes have fallen. By 2014, poverty reduction in the region had become stalled at its 2012 level while extreme poverty rose to 12.0% from 11.3% during the same two-year period. Recent elections and other developments have pointed to growing public disillusionment with once revered left centre leaderships and a turn to the political right. Voters in Argentina recently elected a conservative businessman, Mauricio Macri, president. Voters in Venezuela handed the right opposition a landslide victory in congressional elections, a stunning setback for Hugo Chavez’s successor, Nicolás Maduro. Brazil's congress launched an impeachment probe against President Dilma Rousseff, whose approval ratings have plummeted. The President of Bolivia, Evo Morales, lost a referendum to allow him to run for a third term. The only exception to this trend is President Rafael Correa of Ecuador, who continues to maintain high approval ratings, even in the face of protests. In addition, an increasing number of countries have faced major corruption scandals (Brazil, Argentina, Chile, Mexico). Street protests have become common.

    These events force us to ask: Is Latin America about to move into a downward cycle, one that threatens the political and economic accomplishments of recent years? Will political polarization and political conflict rise--with inevitable negative implications for the economies of the region and for social well-being? There are perhaps some reasons to believe that even if downward cycles cannot be avoided, they may at least be less severe than those of the past. Most of the left-centre governments (with perhaps the exception of Argentina), learned hard lessons from the economically unstable years of the 1960s, the debt crisis of the 1980s, and the hyperinflation of the 1990s, and opted for considerably greater fiscal prudence than in the past. While they all face fiscal deficits, they have not borrowed and spent with reckless abandon. Moreover, the political right appears to have learned that the market alone will not solve poverty and that adjustment must not ignore social consequences. The election of centre/right governments does not mean that governments will abandon concern for social welfare, even if there is some reduction in social spending. Sebastian Piñera, the right/centre president of Chile from 2010 to 2014, increased cash transfer to extremely poor households and although social spending during his years in power increased at a slower rate than under the previous administration of Michelle Bachelet, the level of expenditure was very similar to the three earlier Concertación (left/centre) administrations. Argentina’s new president, presented an ambitious infrastructure plan, promised to boost current welfare programmes, and has called for reconciliation among contending political forces.  

    There is, however, cause for concern. The fact that corruption scandals are so ubiquitous of late speaks to the failure of countries to bring about institutional reform capable of thwarting the transgressions that are now coming to light. The prosperity of the commodity boom arguably papered over some important accountability problems. Another issue, however, is the well-known political and economic impact of commodity booms in the region—the resource curse implications of these booms—a phenomenon that invariably reinforces vested interests and dampens the expansion of other economic activities. Commodity export booms in Latin America have historically induced complacency about the importance of supporting new, potentially dynamic, economic activities (See my earlier blog entry on Brazil). Given the sudden largesse they generate, commodity booms also tend to encourage corruption.

    It is also important to recognize that the social accomplishments and relative political tranquility of recent decades were possible due to the policy manoeuvrability facilitated by the commodity boom. One recent examination of the social policy accomplishments of the region points out that while the new policy initiatives, such as conditional cash transfer programs, were important in reducing poverty and inequality, a significant (and greater) portion of spending continued to support the middle and upper classes. A large portion of social spending continued to subsidize the education of the children of these wealthier socio-economic groups; in addition, substantial state subsidies have gone to manufacturing, transportation, and airlines. The authors of this study estimate that 50 percent more went to these types of regressive subsidies than went to the poor through cash transfer programs. Given the economic slowdown faced by the region, governments will have to make hard choices that will have significant implications for the already established middle and upper classes, for those who find their newly acquired improvements in living standards threatened, and for those who have had their expectations of improved living standards raised by left/centre regimes. The pressures on governments will be substantial. In the absence of highly institutionalized political and policy processes and widespread societal agreements on distributive issues, political contestation and polarization may well increase.

    Furthermore, some of the new governments, such as Argentina’s, have announced new directions in economic policy. That country’s new president has declared his support for a return to free market policies. There is also some evidence that President Macri may make use of presidential decree powers to overcome resistance from a recalcitrant congress that he does not control—such methods were used by President Carlos Menen to impose market liberalization. The Argentine president has already used decree powers to end exchange controls.The government of Argentina is now facing worker protest and mounting unrest over increasing inflation and some 21,000 job losses.

    While Brazil’s left President remains in power, the power of the political right has risen. Increasing numbers of former police and law enforcement officials have been elected to Congress with a platform that calls for tough law enforcement. Conservative caucuses, including powerful blocs of legislators who support the interests of evangelical Christian and agribusiness groups, now account for more than half the seats in Brazil’s Chamber of Deputies. In addition, the Brazilian president must now forge coalitions with conservatives from other parties given that only a third of her cabinet consists of members of her own Workers’ Party. As noted in my earlier blog entry on Brazil, the government has announced substantial cuts in social spending, including cuts in the country’s conditional cash transfer program.

    All of this suggests that Latin America faces a difficult critical juncture—one with many of the features of earlier downward spirals. There are some worrying indications that the commodity boom may have papered over deep societal and political divisions, which are about to resurface.