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Latin America using economic populism to face Covid-19

. Nov 21, 2020
economic populism covid Chilean man protests against inequality. Photo: Erlucho/Shutterstock

An allegory of Latin America, Gabriel García Marquez’s definitive novel “One Hundred Years of Solitude” discusses the inevitable and inescapable repetition of history in the fictitious village of Macondo. Such an irregular and dramatic loop can also be seen in real life Latin America, particularly in its economic history. As authors Rudiger Dornbusch and Sebastian Edwards once pointed out, there is a striking sense of circularity when it comes to the use — by both the left and right — of populist macroeconomic principles for distributive purposes.

We could be witnessing the start of another such cycle, as countries scramble to find solutions to the coronavirus crisis. 

Already marred by debt and with few options to raise funds, governments in Latin America are faced with an unappealing dilemma:

should they sacrifice the future of their economy for short-term salvation — or endure a massive, generational crisis in order to avoid the possibility of <a href="https://brazilian.report/latin-america/2019/11/23/latin-america-boom-bust-frustrations/">immediate collapse</a>?</p> <p>In Argentina, President Alberto Fernández is pushing a highly popular agenda to implement a wealth tax — the bill has been passed by the center-left lower house and now moves to the Senate. The idea is to implement a single tax on citizens with a net worth above ARS 200 million (USD 2.35 million) — rates would vary between 3.5 and 5.25 percent for assets in Argentina or abroad.</p> <p>It is hard to question the nobility of Mr. Fernández&#8217;s proposal. Fewer than 12,000 people in Argentina would be affected by the new tax, while the country as a whole is expected to suffer an economic slump of 11.8 percent this year, with 40 percent of the population living <a href="https://brazilian.report/latin-america/2020/03/17/can-argentina-resist-the-covid-19-crisis/">below the poverty line</a> and double-digit unemployment.</p> <p>But can it work?</p> <p>Past attempts in Europe would suggest not. In 1990, 12 European countries had a wealth tax, against <a href="https://www.npr.org/2019/03/01/699261950/why-a-wealth-tax-didnt-work-in-europe">only three today</a>. According to the Organization of Economic Cooperation and Development, it costs <em>a lot</em> of money to enforce such rules, all while pushing the rich out of their countries. Moreover, billionaires are often skilled at <a href="https://www.nytimes.com/2019/11/15/your-money/wealth-tax-warren-sanders.html">dodging taxes</a> in the most creative ways.</p> <h2>Pandemic accelerates the Latin American pension crisis</h2> <p>Labor in Latin America is largely performed through the <a href="https://brazilian.report/latin-america/2020/07/27/understanding-latin-america-wave-informal-employment/">informal economy</a> — which was severely hampered in the first half of the year due to government-enforced lockdowns. As a way to cope with the liquidity crisis and ease the economic blow, countries such as Peru and Chile allowed citizens to withdraw money from their <a href="https://brazilian.report/latin-america/2020/01/13/pension-systems-latin-america-ticking-time-bomb/">pension funds</a>.</p> <p>This week, the Peruvian Congress <a href="https://www.reuters.com/article/peru-pensions/peru-enacts-law-allowing-second-withdrawal-of-funds-from-pension-system-idUSL1N2I41TV">passed a second withdrawal program</a> in an almost unanimous vote, allowing citizens who have not contributed for more than 12 consecutive months to get their hands on up to PEN 17,200 (USD 4,765). Recently ousted President Martín Vizcarra opposed the bill — but his replacement, Manuel Merino, signed it during his <a href="https://brazilian.report/latin-america/2020/11/17/peru-presidential-merry-go-round-revolves-once-more/">six-day stint as head of state</a>.</p> <p>Experts say some 4 million Peruvians will now empty their pension accounts — making the pension system a ticking time bomb while also weakening the financial system.</p> <p>A similar thing is happening in Chile, as the Senate’s Congressional Committee greenlit discussions over a second 10-percent withdrawal from pension accounts, limited to USD 5,277. The government was initially against the plan but changed its stance due to the proposal&#8217;s popularity among the electorate — and it is trying to make the bill more fiscally responsible.</p> <p>The first round of withdrawals saw 2 million people emptying their accounts. A similar result this time around would mean that nearly half of Chileans would be left with no retirement savings at all.</p> <h2>No economic plan in sight for Brazil</h2> <p>Latin America&#8217;s biggest economy nears the end of 2020 without any certainty about next year in terms of government spending.</p> <p>As our <a href="https://brazilian.report/newsletters/brazil-daily/2020/10/30/squabbles-over-2021-budget-could-throw-brazil-into-shutdown/">October 30 Daily Briefing</a> (for premium subscribers) explained, party squabbles have kept Congress from voting on the Budgetary Directives Law (LDO), which sets the government’s priorities for the following year. That is step one toward drafting the federal budget.&nbsp;</p> <p>If the LDO passes — but not the budget — the government will be allowed to spend one-twelfth of the 2020 budget every month. This has happened four times already — in 2006, 2008, 2013, and 2015.&nbsp; But if the LDO is not approved, we would enter uncharted territory, and parts of the government — with the exception of wages and pensions — would likely shut down in 2021.</p> <p>Despite the current crisis, Brazilian President Jair Bolsonaro&#8217;s approval ratings have endured, thanks to the coronavirus emergency salary. But the benefit is set to expire at the turn of the year, putting the country&#8217;s already feeble political stability in check.&nbsp;</p> <p>To give an idea of how bleak prospects seem for a sizable portion of the Brazilian people, the coronavirus aid accounts for <a href="https://brazilian.report/power/2020/08/20/what-happens-when-brazils-coronavirus-emergency-aid-ends/">97 percent of the income of the country’s poorest 10 percent</a>. Mr. Bolsonaro has promised to create a new cash transfer program for next year, but has yet to present a formal proposal.</p> <p>The government seems split between its political cabinet members, who want to jack up public spending, and deficit hawks led by Economy Minister Paulo Guedes, who defend structural reforms that seem increasingly unrealistic.</p> <p>“Jair Bolsonaro has no plans for the economy, or how to foster growth after the pandemic,” explains Ana Salviatti, an economics researcher at the University of São Paulo. &#8220;The president is in political survival mode.&#8221;

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Lucas Berti

Lucas Berti covers international affairs — specialized in Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.

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