With the five most important economies in Latin America —Brazil, Mexico, Argentina, Colombia and Chile—run by the left, this region is seeing a unique phenomenon. On the one hand, these administrations cause crises by acting more out of ideology than orthodox economic analysis. On the other hand, they prefer to intervene with various subsidies to change the laws of supply and demand in the labor market, hoping to achieve universal income sooner or later.
President Lula da Silva has stated that he will implement expansionary fiscal and monetary policies in Brazil during the next four years. Why do people have to endure suffering as a result of stability? Why is it that deficit reduction is a constant refrain?. Economist Luís Artur Nogueira believes Lula’s speech has “noble goals but does not excuse using bad means to achieve them”.
“Even though Lula sincerely wants to alleviate hunger, he won’t succeed in his mission by breaking up the public coffers. Brazil’s Central Bank will increase interest rates if the country’s finances are driven to wreck. That will be the opposite outcome of what the president wants to achieve,” Noriega said. “Higher interest rates cause economic contraction and unemployment and, as a result, hunger will increase in Brazil.”
Un gran pacto para salvar la selva amazónica en favor de la humanidad. Hacia un cambio de la política antidrogas; un Brasil garante de la.paz en Colombia y el estudio de la interconexion eléctrica de las Américas con fuentes de energías limpias. pic.twitter.com/8NKaupdPsz
— Gustavo Petro (@petrogustavo) January 2, 2023
Colombian President Gustavo Petro, like Lula, has good intentions. He is attempting a “new approach to capitalism,” which is advocated also by Pope Francis to reduce poverty and readjust income distribution. It is not by accident that Mariana Mazzucato, an Italian-American economist near enough to Pope Francis’ new economic ideals and the author of books like Mission Economics: A guide to transforming capitalism (2021), was chosen by Petro as a consultant for his tax reform, which was put into effect in mid-November.
The concern is that, since Petro won the election, the Colombian peso has already lost about 25% of its value against the dollar. In addition, taxes on fuel, hamburger meat, chocolate, cereals, sauces, pastries and beverages have increased, and inflation now stands at 13.28%, the highest level since the end 1990s. Furthermore, the tax on corporate dividends was raised to 20%, while hydroelectric plants now pay a 40% profit-based tax.
Price hikes in Colombia increasingly tighten household finances. At the same time, the horizon darkens, and the possibility of a crisis is more and more palpable, driving away the capital that drives the economy.
The most worrying thing about all this is that basic necessities are the ones that are becoming more expensive; food and nonalcoholic beverages, education, lodging, water, electricity, gas and other fuels, plus transportation, which jointly contributed 1.36 percentage points to the total variation. Bogota’s inflation data (13.28%) was above the estimates of the Colombian Central Bank, which had accumulated annual projections in a range of 7% and 10.60%.
Taking these numbers into account and comparing them with inflation records in other countries in the region, it can be seen that Colombia is today the nation with the third highest hike in prices, after Venezuela and Argentina; and that the substantial loss of value of the Colombian peso against the dollar was a driver of the high inflation that afflicts this South American country today.
Colombia will need to reverse course and regain investors’ trust to overcome the disaster, made more challenging by the need to shift to clean energy.
On the other hand, Petro eliminated all taxes on churches. Some analysts see an increase of “magical realism” in the region, a chiefly Latin American narrative strategy that is characterized by the matter-of-fact inclusion of fantastic or mythical elements into seemingly realistic fiction. The reason is simple: with our capital, it is unrealistic to make economies grow and hunger to lower. According to the most recent World Bank statistics, the proportion of Colombia’s six million people living in poverty has increased to 10.8%.
Petro recently announced that he would default on the terms of road concessions and freeze tolls. Yet, given the contract terms, this forced the Finance Ministry to compensate investors, leaving future ones on alert. Petro also announced his intention to take responsibility for setting household utility bills away from the independent regulator, so he can personally cut electricity costs. Unfortunately, the Colombian President seems to forget the lessons of Venezuela, where the attempt to cement the state electricity monopoly led to collapsing grids and massive power outages.
Colombia will need to reverse course and regain investors’ trust to overcome the disaster, made more challenging by the need to shift to clean energy. In Venezuela, Hugo Chávez’s decision to nationalize the electricity sector in 2007 led to frequent outages and sharply reduced electricity generation by 2009, culminating in a week-long national blackout in March 2019. Despite massive public capital transfers, the country’s power generation is still below its 2007 levels.
Electricity, roads, battery storage, and solar and wind energy are capital-intensive industries, meaning businesses must spend heavily on fixed assets and then recoup their investment over long periods. It incentivizes governments to make unrealistic promises to entice investors and then try confiscating their assets, or positive cash flows through nationalization or price controls. Under these conditions, investors will demand higher capital returns to protect themselves, but this will just give governments even more incentive to expropriate.
“Markets cannot function well under these conditions”, Ricardo Haussman, director of the Center for International Development’s Growth Lab and a Professor of the Practice of Economic Development at the John F. Kennedy School of Government at Harvard University, acutely stated.
Petro should listen to him more than Mazzucato and other Modern Monetary Theory (TMM) supporters. Both Colombian and Brazilian governments seem to be adopting this theory, which favors state intervention in the form of public spending and interference in economic relations. It advocates comprehensive fiscal policies financed through the creation of money by the state because, for TMM, neither debt nor inflation are a problem.
However, so far, it has never been successful in any country.