The pink tide is drowning Latin America

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’ 

While most emerging regions are poised for faster economic growth in the years ahead, Latin America is a disappointing laggard. Incomes are stagnating, migrants rich and poor are leaving for havens to the north, and investors are on the run, driven in part by a new source of political dysfunction. For the first time ever, all of the region’s top five markets are ruled by the populist left. Awash in this “pink tide,” Latin America has the worst stock returns of any region this year.

Caught in another “lost decade,” with per capita GDP growing by a meagre few tenths of a per cent, Latin America is falling behind emerging peers in Asia and eastern Europe, and behind developed economies as well. Income in the pink tide nations of Mexico, Brazil, Colombia, Chile and Peru is on average around a quarter that of the US, having gained no ground over the past 10, 50 or even 150 years.

Latin America tends to rise and fall with global prices for its major exports, commodities such as oil and copper. Over the long term, commodity prices (adjusted for inflation) have remained flat, which explains why the region idles along at the middle-income level. But this decade is defying the normal pattern, as stagnation persists despite rising commodity prices.

The pink tide is the prime culprit for this squandered opportunity. Starting in 2018 with the victory in Mexico of Andrés Manuel López Obrador, left-leaning parties have swept to power, capped early last year by the return of Luiz Inácio Lula da Silva in Brazil. During and after the pandemic, many emerging regions showed relative spending restraint. But Latin America is giving in to what World Bank economist William Maloney recently called “pressure to stimulate growth by any means”.

Deficits have risen higher in Latin America than most other regions. In Mexico they have increased to more than 5 per cent — the highest point since the 1980s. Rising deficits are complicating the battle against inflation, forcing central bankers to keep rates higher for longer, stunting growth.

Meanwhile, state meddling is rife. Erratic stabs at judicial reform in Mexico, constitutional reform in Chile and presidential interference in state-owned companies in Brazil are adding to uncertainty and scaring off international investors.

The squandered opportunity is perhaps most stark in Mexico, which has many economic winds at its back, not just high oil prices. The strong US economy next door, and the “nearshoring” of production out of China should all be giving Mexico a lift. But there it sits.  

Under López Obrador, and now his successor Claudia Sheinbaum, the government halted privatisation of the oil industry, shifted spending priorities from investment to social welfare, and increased the minimum wage by 145 per cent, adjusted for inflation, making Mexico less competitive. Per capita GDP growth fell from disappointing to zero.

Lifted by a booming agriculture sector, Brazil is growing faster than other pink tide countries, yet its outlook is also cloudy. Having promised to stabilise the budget, Lula instead revived social programmes he introduced as president in the 2000s, with help for home buyers, families with children, debtors and more. With Lula seeming to call for a new giveaway each day, the deficit is approaching 10 per cent of GDP, raising doubts about how long Brazil can afford its debts.

Latin America may need to face an even deeper crisis before it commits to effective reform. Argentina, of all places, could lead the way. Last year, it was in a more advanced stage of decline than its regional peers, not merely stagnant but far poorer relative to the US than it was a century ago. Fed up, Argentines voted for radical change and got it in “anarcho-capitalist” president Javier Milei.

Milei has pushed reforms that buck the pink tide: slashing bureaucracy and subsidies, firing civil servants, turning a chronic deficit into surplus, lifting price and rent controls. Monthly inflation has fallen from 26 per cent to below 4 per cent, and investors have noticed. Since Milei took office in December, Argentina’s stock market has boomed, anticipating better days ahead.

In consensus GDP forecasts for the next five years, Argentina shoots from back to front of the pack in Latin America — even as the region remains the world’s growth laggard. Should that scenario pan out, Argentina could become a role model for its neighbours, making violet (Milei’s party colour) the new pink. Until then, Latin America will remain a case study on how not to govern.