Virulent anti-U.S. rhetoric and radical economic policies are plunging resource-rich Latin American countries into poverty despite record high oil prices and an expanding global economy.
Countries such as Venezuela, Argentina, Bolivia, Nicaragua and Ecuador should be booming, but are instead facing declining oil production, mounting debt and an exodus of investment capital, experts say.
“[Anti-U.S.] policies are …hurting them and the damage will increase the longer the radical populists are in power,” says James Roberts, a research fellow at the Center for International Trade and Economics of the Heritage Foundation.
Venezuelan president Hugo Chavez’s policies, for example, have choked off foreign investment, Roberts says. “Who would want to invest in a country that is about to make expropriation of private property the law of the land?” he says. “The Chavistas have tossed out several multinational oil companies, thus depriving Venezuela of needed high technology and foreign investment.”
“Misguided policies and priorities, and corruption, in countries with significant natural resources are already skewing national expenditures and discouraging or preventing serious investments by the most advanced foreign companies,” agrees William Ratliff, a research fellow at Stanford University's Hoover Institution, concurs. “Thus production is declining, being delayed or not even getting started.
“Whatever noble objectives Chavez and his followers may have, the implementation of current and promised policies will undercut the highest hopes, reduce living conditions for majorities and impede improvements for many years to come,” Ratliff says.
Similar policies are also leading foreign investors to think short-term in their strategy in the region, fueling uncertainty, says Beatrice E. Rangel, director of AMLA Consulting.
Venezuela and Argentina will have the highest inflation in Latin America this year. Next year, that dubious honor will go to Venezuela and Bolivia, the International Monetary Fund predicts.
Ecuador, which implemented dollarization in 2000, is spared from the same type of problems, but its economy is expected to see the worst performance this year, according to the IMF.
Meanwhile, bond prices in Venezuela and Nicaragua are being hit. Five-year credit-default swaps based on Venezuela’s debt have increased by six basis points to 3.76 percentage points, according to Lehman Brothers. Yields on the Nicaragua's benchmark 4.5 percent dollar-linked bonds due in 2015 have once again jumped on negative news, according to industry sources.
The mess in the radical countries stands in stark contrast to Brazil and Mexico – Latin America’s two largest economies – as well as smaller nations like Colombia, Peru and free-market bastion Chile. These countries are all seeing growing U.S. and foreign investment.
Brazil, particularly, is seeing a boom in private capital from local and foreign sources thanks to pro-business policies by President Luis Inacio Lula da Silva, a former radical union leader who has improved relations with the United States.
Despite the mess caused by Chavez, his reign will likely continue as long as oil prices remain high, both Roberts and Rangel say. Countries like Bolivia and Ecuador could also benefit from high demand for oil and gas.
“Radical policies in oil rich countries could last for a decade,” Rangel says. “Countries that do not hold large reserves of oil might find the end of the road sooner.”
At the same time, if Cuban-style police-state totalitarianism is firmly established in these countries, the pendulum may not swing back for a very long time, according to Roberts. The only impediment for such a scenario is popular resistance.
“If enough people in Venezuela, Bolivia and Ecuador rise up against this populist tyranny soon enough, perhaps they can throw off those populist-caudillo shackles and restore market-based democracy,” Roberts says.
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