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Presidents Nicolas Maduro of Venezuela and Cristina Fernandez of Argentina are both facing growing opposition. (Photo: Marcelo Garcia/Venezuela Presidency)
Wednesday, September 25, 2013

Economies in Decline

If Venezuela’s economy continues to deteriorate, popular protests, cancelled elections or even an intra-elite coup cannot be ruled out.


August brought more bad news for emerging market countries.  For the first time since mid-2007, the developed economies are contributing more to the growth of the global economy than emerging ones. In part, this is due to the economic slowdown of China, which has reduced its demand for commodities. Also relevant are hints from the U.S. Federal Reserve Bank that it will allow U.S. interest rates to increase.  This has caused a reversal of global capital flows, as investors perceive more opportunities and less risk in the United States and other industrialized countries than in the emerging economies. As a result of this shift, the dollar is strengthening while the currencies of emerging countries are weakening, causing inflation and their current account deficits to increase. The result is reduced growth in the emerging economies.

The impact of these developments is now being felt throughout Latin America, especially in South America’s commodity-producing countries. What is new is that it is also affecting their political systems. When economies are growing, it is easier to govern, especially if governments ensure that not only the rich benefit, but also the middle-class and the poor see their standard of living rise. Nevertheless, once the economies begin to contract, the situation changes, public dissatisfaction increases and government actions become the focus of criticism.

Brazil is the prime example. Its growth has declined dramatically, from 7.5 percent three years ago to under 1 percent in 2012. JP Morgan expects 2 percent growth this year and Nomura, 1.5 percent. Brazilians have taken to the streets with a growing list of demands, ranging from an end to wasteful spending and corruption to free bus fares. The government has tried to defuse the protests, but its policies lack consistency. President Dilma Rousseff’s popular support has fallen from a high of 57 percent to a low of 30 percent. Recently, some members of the governing party have begun to talk about encouraging popular former president Lula to run again, since things   were   better   when he was president. But the fact that Brazil enjoyed an expanding economy during the commodities’ boom, which coincided with Lula’s presidency, obviously does not mean that Lula can repeat his earlier performance in the absence of robust economic growth in China.

Argentina is another example. In the August party primaries for the congressional elections, the Victory Front, a branch of the Peronist Party that supports President Cristina Fernández, registered its worst performance in ten years, receiving only 29 percent of the votes cast. At the same time, her candidate for the Chamber of Deputies from the province of Buenos Aires lost to Sergio Massa, a former member of

Fernandez’s government and the current governor of Tigre, who won 37 percent of the vote. The poor showing of the president’s wing of the Peronist Party could mean a probable congressional defeat in October and the end of Fernandez’s plan to change the constitution to allow her to seek a third term. Furthermore, Sergio Massa, who is alleged to have presidential aspirations and has said he would reverse Fernandez’s failed economic policies, could conceivably win the presidency in 2015, particularly if inflation continues to accelerate and the government’s policies continue to discourage foreign investment.

Finally, Venezuela is scheduled to hold municipal elections in December of this year. Given the rampant inflation, declining oil output, anemic economic growth and massive corruption, the government has increased its crackdown against its opponents. If the economy continues to deteriorate, popular protests, cancelled elections or even an intra-elite coup cannot be ruled out.

It is never easy to govern during difficult economic times. Nevertheless, some Latin American countries will be able to manage the political conflict that an economic slowdown produces better than others, especially those that have strong institutions, good leaders and a popular consensus regarding the political rules of the game. By these criteria, Brazil ranks first, Argentina second and Venezuela dead last.

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


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