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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Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

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