Governance remains an issue for Latin America despite reforms in recent decades
March 27, 2019 |
Gone are the ill-devised policies from earlier days, but governments still face a host of challenges ahead
The past couple of decades has witnessed unprecedented reform in Latin America. Colombia and Peru have implemented changes to their pension systems inspired by the pioneering reforms of Chile. Mexico has doubled down on its efforts to become a free trade star. Even Brazil, led by a left-wing government for much of this time, has revamped regulations governing a variety of industries, injecting more competition and adopting world-class standards. Along the way, millions have been integrated into the formal economy. Living standards have steadily climbed.
Despite these impressive gains, there remains a lingering frustration with Latin American countries. Monica de Bolle, a senior fellow at the Peterson Institute of International Economics and an expert on the region, best sums it up. Ask her: does Latin America offer a friendlier investment environment than it did 20 years ago? “There is absolutely no doubt about it,” she responds immediately. But she hedges a bit, adding: “But it could be much better.”
Though Latin America may no longer embrace the ill-devised economic policies of the 1980s and 1990s, the region is still seen as a tough place to do business. Brazil continues to impose onerous taxes on companies. Mexico still suffers from high employment informality and an unreliable judiciary. Colombia is still in a decades- long civil conflict. And Argentina, which experienced a long period of flawed economic policies, is trying to get back on track. “Business executives believe that transparency of policy making is weak in the region, and the perception of corruption is high,” says Stephen Brien, the director of policy at the Legatum Institute, a London-based think-tank.
The latest issue of the prosperity index published by Legatum concluded that the quality of governance is actually declining in Latin America, with only 26% of those surveyed expressing confidence in their governments. The mistrust is particularly high in Brazil, Colombia, Mexico and Argentina, the biggest economies in the region. This negative sentiment comes during a prolonged economic slump that has eroded many of the gains made by an emerging middle class in recent years. Recent corruption scandals, such as those uncovered by Operation Car Wash in Brazil, also contributed to the somber mood.
Still, the undeniable challenges ahead should not obscure the fact that a range of important improvements have been achieved in the past two decades. Augusto de la Torre, a former chief economist for Latin America at the World Bank who now teaches at Columbia University, cites significant advances made in macroeconomic policy, especially on the monetary side. Central banks have gained more autonomy to implement inflation targets, while economic ministries have been populated with well-trained, respected technocrats. Moreover, governments like Peru and Chile have deployed anti-cyclical policies to minimize extreme boom and bust periods.
“Latin American economies used to have weak currencies. Now many of them, especially those with inflation targets, have credible currencies,” de La Torre says. Governments have also introduced stricter regulations. As a result, banks are generally well capitalized, solid and profitable, and failures that have taken place in recent years have hardly had systemic implications. “Banking systems used to be very weak, but now they are fairly resistant” to economic downturns, de La Torre says.
But myriad challenges remain. Drug-related crime has taken on regional proportions, feeding a sense of insecurity across Latin America. De La Torre also points out that companies in Latin America tend to grow more slowly than those in Southeast Asia, a possible product of unfriendly labor regulations, excessive bureaucracy and a poorly educated labor force.
Some countries face their own unique problems in addition to regional challenges. Brazil, for example, is facing a public pension crisis where the system may not be able to meet its obligations in a few years. Mexico is still struggling with widespread informal employment in its economy. And Argentina, which has undertaken significant reforms over the past two years, is feeling the impact of higher US interest rates, thanks to a pile of dollar-denominated debt it acquired to fund the government’s budget deficit.
And then there’s the uncertainties of politics. Investors worry that the new administration of Andrés Manuel López Obrador in Mexico may not be friendly to the business community, especially after his cancellation of the new international airport at Mexico City. And while Brazil’s Jair Bolsonaro is viewed favorably by global investors for his pro-business sentiments, many are concerned that his populist views could undermine democratic institutions. “Institutions are holding up, but there are still risks,” de Bolle says.