Latin America´s Leftist Tide - Less Ebb than Flow

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24 May 2010

Much has been made of Latin America´s ‘leftist tide’ in the last decade. After disappointment with Washington Consensus Policies such as privatization, trade liberalization and deregulation, the last decade saw the assent of nine nominally ‘leftist’ governments in Latin America, promising to sweep away neo-liberal orthodoxies and redistribute wealth to the poor. Not only that, they promised to break with economic ‘dependency’ on the developed world and chart their own paths. But did the new leaders insulate their countries from the worst of the recession, or make them more vulnerable to it?

Of course, it’s long been evident that not all Latin American ‘leftists’ share the same views or policies. Some observes refer to ‘carnivorous leftists’ which are strongly opposed to free market capitalism, exemplified by Venezuela´s self-acclaimed ‘21st century socialist’ Hugo Chávez, and the ‘vegetarians’ such as Brazil´s Lula, who maintain free-market orthodoxy while rolling out social programmes for the poor. Until the recession, both varieties enjoyed fantastic economic conditions to achieve their goals, as booming commodity prices allowed for five years of high growth, and poverty reduction.

But how would these countries fare when conditions were not so friendly? Latin America has had its booms, all followed by busts. Did the policies of the region’s leftist governments better insulate them from external shocks, or did they become even more reliant on external demand and high prices for their commodities?

One and a half years after the recession began, it seems clear that Latin American countries of all political hues have not been as affected as might have been feared. While the Economic Commission for Latin America and the Caribbean (ECLAC) calculated that there would be around 9 million extra people living below the poverty line as a result, this did not undo the previous years of poverty reduction.

Heads above water

According to one study, the reason behind this relative buoyancy was that governments had learned lessons from past experiences, such as having more control over the rapid arrival of short-term, speculative capital. This is important for reducing vulnerability, because it means that there is less risk of vast capital flows destabilising national economies.

Another lesson learned was using commodity booms to build up capital reserves, which they then used to spend during the recession to counteract falls in trade and investment.
In this context, Latin America´s left had a varied experience. Brazil enhanced its reputation as an emerging economic power by recovering quickly from recession ( According to Lula, who had made headlines by blaming the crisis on ‘white men with blue eyes’, this was mainly due to investments in agriculture, housing, infrastructure, and social programmes.

But what about Venezuela? For years, Hugo Chávez´s critics had eagerly awaited the day when oil prices would collapse, leaving the economy in tatters. In the event, Venezuela undoubtedly suffered, with an economic contraction of 2.9 per cent in 2009. This was not as bad as Mexico, which suffered from its high dependence on the United States, but it was still worse than the regional average, which ECLAC estimated as a 1.8% contraction. Ironically, the usually sympathetic Centre for Economic Policy Research (CEPR) argues that much of this contraction could have been avoided, but that the government actually failed to provide a strong fiscal stimulus despite having the capacity to do so. That was clearly a blow to the government, who enforced an unpopular currency devaluation in January, and is being blamed for rampant crime, food shortages and the energy crisis.

Although Venezuela´s economy has taken a battering, it has certainly not been the collapse predicted by some analysts. While the International Monetary Fund (IMF) predicts that the Venezuelan economy will struggle over the next few years, the CEPR points out that the IMF has a history of underestimating Venezuela´s future economic growth.

The Bolivian boom

Perhaps the biggest success story has been Bolivia. In 2005, the country made history by voting in Evo Morales, the nation’s first indigenous president. As noted by ECLAC  and CEPR, Morales´s early years in power saw unprecedented high growth and poverty reduction. Controversially, Morales nationalised the country´s gas reserves, which led to a staggering 20 per cent rise in government revenue virtually overnight.

Now, according to a study by the Overseas Development Institute (ODI), Bolivia has emerged from the recession relatively unscathed. It did this thanks to the substantial foreign reserves it built up from the gas nationalisation and commodity boom, allowing it to implement social policies to counteract the worst effects of the recession. These included programmes to ensure that children stay in school, that pregnant women get adequate maternity care, and that the elderly are able to live in dignity.

Remarkably, after a year which saw dramatic falls in remittances, foreign investment and export prices, a US revocation of trade preferences and an ongoing destabilisation campaign by the opposition, Bolivia´s Minister of Economy proudly announced that Bolivia had overtaken Paraguay and ceased to be the poorest country on the continent. The IMF, which was sent packing by Morales just three months after he took office, has recognised that it would experience the highest economic growth in the region in 2009. However, the ODI has expressed doubts that sufficient investment is going into the hydrocarbon sector, upon which the rest of the economy depends.

A capitalist backstory

Clearly, the experiences of Latin America´s leftists have been varied. It would be naïve to claim that they have become ‘insulated’ from international economic trends, as they remain heavily dependent on revenue from finite primary products. Ironically, they owe a large part of the success of their push towards ‘21st century socialism’ to the relatively unbridled capitalism of India and China.

Even so, it does seem clear that Latin American governments have learned from previous crises, and governments of all political hues seem to be emerging from the recession with their economies intact. Even so, growth and poverty reduction in the region remains as tied to the depletion of natural resources as ever before, meaning that Latin America´s leftist tide has not made it less dependent on the world economy, and has certainly not made it more sustainable. These are crucial issues to consider, and will be further examined by Due South in the coming weeks.


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