For investors in Latin America, history matters
In his book Basta de Historias! (Enough of the Stories!) Latin American journalist Andres Oppenheimer complains that Latin America’s endless glorification of past freedom fighters and early state-builders prevents the region from looking to the future. The following memorable quote sums up his position perfectly: “The 200-year anniversary of independence in some countries has sparked a wave of necrophilia. Many countries are literally digging up the remains of their independence heroes as part of a growing obsession with the past.”
One can see his point. Listening to leaders constantly trying to evoke the image of Simon Bolivar to sell their latest tawdry policy does get a bit boring. But for British investors looking to put money in the region, understanding its history is actually pretty useful. That’s because most of the countries in the region have been battling the same problems for the last few hundred years. And recognising these old struggles can help investors figure out the best place to put their money today.
Latin America’s history of bitter struggles
One recurrent theme in Latin American politics has been the failure of governments to win the approval of a broad section of society. This stems from the fact that the governments inherited territorial boundaries that had more to do with the organisation of the Spanish Empire than the countries themselves. The new countries lacked social cohesion and people were profoundly split about the political and economic model they wanted their countries to follow.
Over the centuries, political battles over this split erupted in civil wars, uprisings and coups. With time, the arguments have changed. It began as a battle between liberals and conservatives, then rural elites clashed with the new urban workers and finally free market trade was pitted against state intervention. The only thing that hasn’t changed is the bitter nature of the struggles.
Contrasting opinions are, of course, common in any healthy democracy. The difference in Latin America is that the opposing sides didn’t just disagree on policy, but also on the fundamental economic and political model the state should take.
Often, as elsewhere in the world, the battle wasn’t really ideological. It was more that different vested interests were trying to impose the order that suited them best. As Oxford professor Edwin Williamson notes in his excellent History of Latin America, the problem was that no-one had built an economic model and political system that could keep both sides happy. It was often one side of the economy against the other. That made conflict inevitable. It also limited progress because moves in one direction were blocked by vested interests, or completely reversed at the next transfer of power.
And because no government could win a broad consensus, dictatorships sprung up to enforce one view or another. This continued until very recently – in places such as Argentina, Chile and Brazil the current democracies are only 20 to 30 years old. In Mexico, some people will tell you that true democracy only began in 2000, when the country had its first new political party in 70 years. So which of these new democracies looks to have finally found a broad consensus on the basic economic and political model for the state?
Building stable economies in South America
Rafael Correa has done an amazing job of building popular support. He recently won his third term in office – an incredible achievement considering there were seven different presidents in the decade before he came to power. Like any good politician, Correa has done this by making sure that enough people have a share of the pie. Increased social spending has ensured the loyalty of the lower classes and – despite his firebrand speeches – he’s also been careful to include some of the elites in his citizens’ revolution.
In Argentina, the husband and wife combination of Nestor and Cristina Kirchner has dominated the ballot box for more than a decade – although discontent is now growing. Whether you agree with Ecuador or Argentina’s economic model or not, one thing is certain: these skilled politicians have been able build a strong enough powerbase to be able to implement their respective models. That stability is one reason why those countries have enjoyed strong economic growth. But one still has to wonder what will happen when elections lead to a change of government.
In that sense, Chile, Peru and Brazil are more reassuring. All three countries have seen parties from both the left and right since emerging from dictatorships. And crucially, while the changes at the top brought some policy adjustments, the underlying economic model remained the same. That gives stability for investors and also allows the economy to grow, without the rules being changed every five years or so.
In effect, it shows that a broad chunk of society agrees on an economic model and just differs on some of the details. In all three countries there have been some surprises. For example, when the current Peruvian president, Ollanta Humala, came to power the Peruvian stockmarket tanked in anticipation of a sharp lurch to the left.
Humala had proved himself something of a wild card by leading an unsuccessful uprising in 2000. But when he was elected, it became apparent that Humala seems to have decided that the best way to deliver his social reforms is by working with the system.
It was a similar story with former Brazilian president Lula, whose pre-election left-wing rhetoric contrasted the boom in foreign investment once he came to power. Meanwhile, in Chile, the conservative billionaire president Sebastian Piñera surprised many by making concessions to the left when the right finally got elected in the post-dictatorship democracy.
Threats to stability
In the last year or so, we have seen some challenges to the consensus in these countries. In Chile, students protesting against the inequality of higher education have become a major political force. Meanwhile, Brazil’s left-wing government has come under attack for failing to look after the poor. In response to the protests, Chile’s new president, Michelle Bachelet, has promised radical education reform that she may not be able to fully deliver.
We may see a few pictures of burning cars and rubber-bullet-firing police at this year’s World Cup – unless, of course, Brazil’s football team manages to distract protestors. But that shouldn’t scare investors. After all, neither set of protestors is calling for a radical change of system – rather, they are demanding a (fair) change within it.
Colombia is another country with a strong consensus. Despite its reputation for drug violence and guerrilla insurgents, the Colombian governing classes have long had a broad agreement on economic management. Incumbent centre-left president Juan Manuel Santos seems likely to win this year’s elections. But even if he didn’t, any of the likely replacements would maintain the path of economic liberalisation that the country has travelled since the early 1990s.
Why Mexico has big potential for UK investors
At present, the most interesting situation is in Mexico. That’s because the Mexican government is in the process of changing its economic model. It wants to open up to international firms and foster competition to the dominant local oligopolies.
For the best part of 30 years, Mexican economic growth has been sluggish. If you strip out population increases, it was about 1.4% per year between 1980 and 2010. That poor performance has bred a strong desire among governing elites to reform the economy. For the last 20 years, as the system became more of plural democracy, bickering between the parties – exacerbated by a political system that makes it hard to change the constitution – meant that little reform was delivered.
But last year, the new president, Enrique Peña Nieto, managed to co-opt the other two main parties into a ‘Pact for Mexico’. The pact is an agreement between parties to compromise and pass reforms where they share interests. In effect, it allows Peña Nieto to ally with either the left or right-wing parties to pass new legislation.
Now, a lot of credit must go to the opposition parties. In many cases, these are reforms that they have wanted to pass for years only to be blocked by Peña Nieto’s PRI party. Yet they are taking a realpolitik view. As the leader of PAN recently told a meeting of EU diplomats, “We have achieved more in one year of opposition than we managed in 12 years of power.”
The crucial question for investors is – are people on the street in favour of these reforms? The government needs to persuade the people that its plans to open up sections of the economy to foreigners will improve conditions for ordinary Mexicans. In fact, it’s already doing that.
On the streets there are already lots of adverts promising that the energy reform – which could prove a great investment opportunity for British firms – will lead to lower household electricity bills. It might sound prosaic, but it’s everyday concerns like this that breed support for, or discontent with, a new economic model. If he pulls it off, it would be a massive investment opportunity. More than 70 years ago Mexican president Lazaro Cardenas nationalised the (mainly British) oil firms. It was one of modern Mexico’s proudest moments. Now a successor from that same party seems likely to open the sector back up – in what could be a massive opportunity for UK investors.
• This article first appeared in The New World, MoneyWeek’s FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.