Amlo makes economic mis-steps just as Bolsonaro delivers reforms
Mexico’s populist agenda threatens Latin America’s second-largest economy
The past two weeks have underlined how Latin America’s two biggest economies are increasingly heading in opposite directions. Since they are run by administrations near the start of their terms and account for nearly two-thirds of the region’s gross domestic product, the economic prospects of Latin America for the next decade depend in large part on their success.
In Brazil, hard-right president Jair Bolsonaro finally produced major policy achievements. Investors had criticised him in his first months for spending precious political capital pursuing a divisive social agenda while failing to deliver on promises of economic reform.
Last week, Mr Bolsonaro’s administration won decisive backing from the lower house of the National Congress for a plan to rein in the cost of Brazil’s unaffordable public sector pensions.
Brazil spends nearly half the federal budget on public sector pensions so the reform is highly significant. It still needs to pass several more congressional steps before becoming law but the momentum behind it now seems unstoppable.
‘The only question [in Brazil] is about governability, or the capacity of the administration’
This came less than two weeks after Brazil and three other South American economies in the Mercosur bloc reached agreement on a landmark free trade deal with the EU after 20 years of talks.
“Brazil has a very reform-minded, investment-friendly economic team that is pushing forward with a very bold macro and micro reform agenda,” said Alberto Ramos, head of Latin America economics at Goldman Sachs in New York. “The only question there is about governability, or the capacity of the administration, a minority government, to co-opt a fragmented and sometimes oppositional Congress?.?.?.?But, albeit slowly, we see some forward progress there.”
Further north in Mexico, the contrast could not have been greater. Finance minister Carlos Urzúa, seen as the strongest voice for moderation in an increasingly investor-unfriendly administration, resigned abruptly. In a devastating farewell letter, he accused President Andrés Manuel López Obrador’s government of making policy without evidence and imposing unqualified officials in roles where they had a conflict of interest.
Mr López Obrador, known as Amlo, responded by shrugging off the departure of a formerly sympathetic ally as the inevitable price of real change. He spoke proudly of his “Fourth Transformation”, putting it on a par with previous revolutionary moments in Mexican history. “We are committed to change the anti-popular economic policy of surrender,” he said at his daily news conference. “This is not a simple change of government, this is a change of regime.”
To be clear, the 36 years of “neoliberal policies” that Mr López Obrador is determined to end encompass Mexico’s shift away from a closed, nationalist economy towards an open, free-market economy closely integrated with its neighbours in Nafta.
One former senior Mexican official described Mr Urzúa’s departure as a “torpedo below the waterline”. Another noted the near impossibility of Mr López Obrador achieving his stated goals of simultaneously running a small budget surplus, boosting social spending sharply, investing in big infrastructure projects that lack a sound business case and turning around the ailing energy industry on which government revenues depend.
To be sure, the jury is still out on whether Mr Bolsonaro and his investor-friendly economic team can stick together and build on their early successes to turn around Latin America’s biggest economy. Similarly, Mr López Obrador might yet tack back towards the centre when the going gets tough.
But analysts lament that one problematic country has replaced the other with the change in leadership, weighing on the continent’s economic prospects. Mr Bolsonaro inherited a country that had not grown in five years, groaning under an unsustainable fiscal deficit and high joblessness. Mr López Obrador was bequeathed steady growth, balanced public finances and full employment.
“What was needed in Mexico was more reforms, to attract more investment and increase competition, to elevate productivity, rather than a complete reversal of the economic model,” said Goldman’s Mr Ramos.
michael.stott@ft.com |
