Blessed by Resources, Cursed by Politicians

The Iglesia de la Compania de Jesus, built in 1671 is Argentina's oldest church; Argentina's oldest university is on the same block. (Jacob W. Roberts)

The Iglesia de la Compania de Jesus, built in 1671 is Argentina’s oldest church; Argentina’s oldest university is on the same block. (Jacob W. Roberts)

President Cristina Kirchner’s health concerns last year are emblematic of the issues that have enshrouded Argentina’s economy and political scene for the past half-century. Over the past few decades Argentina has suffered economic crises, political scandals, and national tragedies. From a failed invasion of the Falkland Islands to the La Guerra Sucia (The Dirty War), in which the Argentinian military killed thousands of its own citizens and kidnapped thousands more infant children, the land of silver has had its share of national embarrassments. More recently in 2001, an attempt to peg the Argentinian peso to the US dollar resulted in default, runs on banks, and an enduring distrust in their financial system.

This distrust continues to manifest itself today. So much as stroll down Florida Street in Buenos Aires and shout, ‘Yo tengo dólares’ and you will be attacked by swarms of porteños (people of Buenos Aires) desperate to buy American currency for many pesos above the government-regulated exchange rate. Even a decade after the economic crash, there remains tremendous distrust in banks. Many Argentinians choose to stash loose cash under their mattresses rather than confront the risk of entrusting it in a financial institution.

Cristina’s leadership has hardly put her citizens’ fears to rest. Over a year ago, she expropriated YPF, a Spanish-owned oil company that her husband sold the rights to decades earlier while governor of Santa Fe. Curiously enough, the money from this deal has never resurfaced. As if encroaching on international law isn’t enough, Cristina has sought to alter the constitution to eliminate the term limits that prohibit her from seeking re-election. While she did not hesitate to dole out welfare benefits to the poor prior during the 2011 election, she was quick to scrap these pay outs following her successful re-election.

In spite of the billions of dollars in agricultural products and commodities being exported to China and other nations in recent years, little of this money has led to domestic development. Driving from San Isidro into the capital, one will pass by thousands of impoverished Argentinians squatting in sevillas, shack-like dwellings constructed out of discarded metal, wood, and concrete. Critics of Cristina are quick to point out that when Cristina entered office there were only one-story shacks in this shantytown, but now it is hard to find a single shack under three-stories high.

These failures as both a nation and as an economy are difficult for many Argentinians to face. Their sense of national pride is nothing to scoff at. In the 1980’s there was a common saying in Europe that one should buy an Argentinian for what he is worth and sell him for what he thinks he’s worth. Even a century after Argentina’s position as the hegemon of the Americas was usurped, many still feel as though their nation is destined to regain its past glory. What few Argentinians will deny is that their country is a land blessed by resources and cursed by politicians. From Peron to Cristina, there have been many crises of leadership. Only time will tell if Cristina’s inevitable downfall will lead to a century of progress and internal development or continued stagnation and corruption. Until then it would be unwise to make any large deposits into El Banco de La Nación.

What’s Eating Brazil’s Rapid Growth Rates?

A demonstrator tries to stop the riot police during one of many protests around Brazil's major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil's biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

A demonstrator tries to stop the riot police during one of many protests around Brazil’s major cities in Rio de Janeiro June 20, 2013. Tens of thousands of demonstrators marched through the streets of Brazil’s biggest cities on Thursday in a growing protest that is tapping into widespread anger at poor public services, police violence and government corruption. REUTERS/Sergio Moraes

Only a few years ago Brazil was on the rise. Both a BRIC country and economic the superstar of Latin America, Brazil enjoyed fantastic growth rates as it rode the wave of a commodity boom. With a young population and many untapped growth opportunities, Brazil seemed poised for continued growth and prosperity.

Unfortunately, even the commodity king of Latin America is not immune to an economic malaise. In contrast to its impressive 7.5% growth rate in 2010, Brazil puttered along at a meager 0.9% in 2012. While growth rates are forecast to rise in 2014, social unrest abounds. Just last year, protesters took to the streets in response to hikes on bus fares and corruption scandals in addition to a general outrage for exuberant government spending on stadiums for the upcoming World Cup and Summer Olympics.

The protestors’ indignation is understandable but would be better directed at failed policies and excessive government spending than at publicized scandals. A whopping 11.3% of Brazil’s GDP is spent on public pension plans, comparable to OECD European nations with much older populations. Its public spending, which amounts to 38.5% of GDP, rivals that of many developed countries.

Opponents of austerity will counter that the anti-poverty policies embraced by former President Luiz Inácio Lula da Silva, or “Lula” for short, lifted nearly 25 million Brazilians out of poverty. Now close to half of Brazil’s population lives in the middle class, and while real income has increased by only 20% for the 10% wealthiest Brazilians, its poorest 10% have seen their real wages double in the last decade. So long as Brazil finds other paths to economic growth, such expensive state intervention can be sustained.

Brazil’s best shot at stimulating growth rates lies in meaningful reform. A disproportionate amount of Brazil’s education spending is lavished upon institutions of higher learning. More of this money should be spent on primary and secondary schooling, and less of it should go to teacher’s pensions, which are unsustainably high.

Reallocation of money from its inflated pension system to investments in infrastructure could pay enormous dividends to Brazil’s economy. While Brazil’s agricultural and commodity production is globally competitive, it is stymied by exorbitant transportation costs that eat up as much as 22% of the costs of production. Improved roads and developed transportation systems could work to alleviate this inefficiency.

Policy makers should also work to streamline its onerous tax code and customs procedures. Doing so would sharply curtail exportation and production costs, in turn bringing Brazilian products to a higher echelon of competitiveness. At the moment, manufacturing costs are continuing to rise while technological advances in production are stagnant. A concerted effort by policy makers to cut manufacturing costs does not need to be a priority, but should be on the backburner as a way of diversifying Brazil’s national income.

These barriers to economic growth are easily remedied. If President Dilma Rousseff or her successors adequately respond with sound economic policies in the coming decade, Brazil will be well on its way to solidifying its place as a world economic power. With a high national birth rate, copious amounts of land and resources, and countless opportunities for reform and infrastructure development, Brazil’s prospects are excellent. In the end, it is not a question of whether Brazil’s economy will continue to grow, but whether its government will allow it to.