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Economy

Latin America, Time To Pay The Bill For Economic Populism

As prices on oil and other raw materials drop, the cycle of what some call "macroeconomic populism" is hitting a rather tough patch, especially for Argentina and Venezuela.

In Maracaibo, Venezuela
In Maracaibo, Venezuela
Luis E. Gonzalez C.

-OpEd-

SANTIAGO — Making the reduction of income inequalities the sole focus of public policy — dubbed macroeconomic populismhas been a recurring presence in Latin American economic history. At certain times over the past 40 years, it has been costly and traumatic, which is true today for Venezuela and Argentina.

This policy approach often overlooks internal restrictions such as the simultaneous need for sustainable fiscal balance, price stability and wage alignment based on productivity. There are also external limitations such as balancing trade and improving the country's international credit rating, all hopefully within a framework of growth. And populism today has acquired an additional association with bad institutions that aggravate the problem of concentrated markets.

The populist cycle, which lives through three phases of varying duration, is often attributed to irrational voting motivated by an overwhelming faith in electoral promises that ignores potential long-term consequences. Others see the durability in populism in the unfortunate combination of unsatisfied social and political demands, as well as the absence of institutions that equitably distribute the benefits and burdens of society.

Raiding the market

From 1990 to 2003, Argentina had a growth rate of just 2.1% of GDP, an unemployment rate of 14.6% and average inflation rate of 197%. Venezuela grew about 2.5% a year up until 1999, with unemployment at 10.1% and average inflation of about 46%. There was public dissatisfaction with economic performance in both countries. There were calls to redistribute incomes as part of reactivating and restructuring the economy, as successor regimes took power and ushered their countries into "the antechamber" of the populist era.

In the first part of that period between early 2000 and 2011, attending to the social clamor of both countries was the recurring theme that justified a relentless rise in public spending and "raids" into market territority by imposing price controls of various types. The public welcomed measures such as fossil fuel subsidies as high as 80%, taxes and restrictions on dollar trading, import/export quotas, and certain tax incentives and industry nationalization.

External conditions were favorable. Increasing Chinese demand from 2002 boosted energy and commodities prices during that period — soya 25%, cereals 49.5% and oil 103.5%. This gave the confused impression of impressive growth, with rates of 4.8% and 7.1% of GDP for Venezuela and Argentina, respectively.

But the bill for these policies inevitably arrives. A more than 40% fall in crude oil prices and about 20% for other raw materials has decimated the revenues of both countries. Growing unemployment, the end of protected jobs, food and consumer shortages, power cuts and ballooning debt are all symptoms announcing the coming, third phase of the populist cycle: crisis and collapse. The International Monetary Fund expects both economies to shrink about 2% in 2015, and the mid-term panorama is somber.

Evidence shows that macroeconomic populism is unstable despite advances in the "good years," perhaps because of its exclusively short-term focus. Both these countries need institutions that will create credible and stable expectations that encourage investment, rather than promises that destroy what was built before them.

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Geopolitics

Utter Pessimism, What Israelis And Palestinians Share In Common

Right now, according to a joint survey of Israelis and Palestinians, hopes for a peaceful solution of coexistence simply don't exist. The recent spate of violence is confirmation of the deepest kind of pessimism on both sides for any solution other than domination of the other.

An old Palestinian protester waves Palestinian flag while he confronts the Israeli soldiers during the demonstration against Israeli settlements in the village of Beit Dajan near the West Bank city of Nablus.

A Palestinian protester confronts Israeli soldiers during the demonstration against Israeli settlements in the West Bank village of Beit Dajan on Jan. 6.

Pierre Haski

-Analysis-

PARIS — Just before the latest outbreak of violence between Israelis and Palestinians, a survey of public opinion among the two peoples provided a key to understanding the current situation unfolding before our eyes.

It was a joint study, entitled "Palestinian-Israeli Pulse", carried out by two research centers, one Israeli, the other Palestinian, which for years have been regularly asking the same questions to both sides.

The result is disastrous: not only is the support for the two-state solution — Israel and Palestine side by side — at its lowest point in two decades, but there is now a significant share of opinion on both sides that favors a "non-democratic" solution, i.e., a single state controlled by either the Israelis or Palestinians.

This captures the absolute sense of pessimism commonly felt regarding the chances of the two-state option ever being realized, which currently appears to be our grim reality today. But the results are also an expression of the growing acceptance on both sides that it is inconceivable for either state to live without dominating the other — and therefore impossible to live in peace.

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