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It is not clear if Brazil's President Dilma Rousseff will be prepared to give up her long-held belief that a big state role is essential for the Brazilian economy to grow and develop, the author points out. (Photo: President Ricardo Stuckert Filho/PR)
Wednesday, June 4, 2014

Latin America: Magical Realism

Brazil seems to be working hard to avoid implementing the reforms needed to restore economic growth.


One of Latin America’s greatest writers, Gabriel García Márquez, recently passed away. His most famous novel popularized “magical realism,” a writing technique that infused realistic narratives with magical thinking. Recent developments in Latin America, however, have caused me to believe that “magical realism” is not confined only to Latin American novels.  It also seems to characterize the way in which many Latin American leaders think about politics and economics.  

I am thinking particularly of Venezuela, Argentina and Brazil.  Although they are very different countries, their governments do not seem to have accepted the fact that the end of the Chinese-driven commodities boom and of low interest rates in the United States means that they must change the policies that they have pursued until now. Without the easy money that had been available to them until recently, they will need to adopt long-neglected reforms to avoid the political consequences of slower growth. 

The government of Venezuela, led by Nicolás Maduro, seems the most removed from reality. When he became president last year, the billions of dollars of oil income that had flowed to Venezuela during the Chávez years had disappeared.  A relatively small portion had been used to help Venezuela’s poor; the rest to buy support for Chávez’s policies, as well as to enrich the new Bolivarian elite. Despite declining oil production and the absence of new investments and loans, Maduro has continued Chávez’s lavish spending, thereby producing an inflation rate of 56 percent that is expected to reach 75 percent by the end of this year. Maduro seems to believe that the poor will continue to support him, despite their rapidly-deteriorating economic situation, but former Brazilian president Luiz Inacio “Lula” da Silva, a friend of the Bolivarian Revolution, seems to think otherwise. This is why he pushed Maduro to begin a “dialogue with the opposition.” It seems doubtful, however, that Maduro will survive much longer if he fails to implement reforms to stop the downward spiral of the economy, despite the presence of thousands of Cubans helping him keep order through increasingly repressive means. 

Argentina also seems to have been caught up in its own brand of magical thinking. President Cristina Fernández de Kirchner thought that she could continue spending as freely as she did during the commodities boom, despite growing inflation, a precipitous decline in foreign investment, falling dollar reserves and growing capital flight. Recently, however, there are signs that she is beginning to adjust to reality. She has let the peso devalue by 18 percent, has cut heating-gas subsidies and agreed to pay $5 billion to Spain’s Repsol for the nationalization of the oil company YPF.  Some observers say she had no choice since Argentina was running out of money. Whatever the reason, these new policies are beginning to attract new investment. 

Finally, there is Brazil, which seems to be working hard to avoid implementing the reforms needed to restore economic growth.  The economy, which grew 7.5 percent in 2010, last year grew less than 2 percent. Prospects for the coming two years do not look much better. The country’s vast oil reserves have not been exploited efficiently; in part, this is due to protectionist policies that require using a certain minimum of local content in the ships and drills built in Brazil. The credit boom, which fueled consumer spending during the years of high growth, has not been significantly reduced. Brazil has also done little to reform or disband Mercosul, a dysfunctional trade group that has discouraged increased economic competitiveness among its members. Unlike Argentine president Fernández de Kirchner, President Dilma Rousseff hopes to be re-elected this year. She sees herself in a race against time, trying to postpone making the needed reforms until after the elections. It is not clear, however, that if she is re-elected, she will be prepared to give up her long-held belief that a big state role is essential for the Brazilian economy to grow and develop.   

It is difficult to implement reforms during periods of economic decline. Nevertheless, it would be useful if Latin American countries that are especially vulnerable to changes in the global economy could more realistically assess and deal with such declines sooner rather than later.

Susan Kaufman Purcell is the Director of the University of Miami’s Center for Hemispheric Policy. This article originally appeared in the May issue of AmericaEconomia magazine. Republished with permission from the author. 

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