Giving too much money to politicians is like feeding candy to children: it always leads to bad behavior. Latin America is no exception. The decade-long economic boom driven by high commodity prices and cheap capital has been good to Latin American governments and consumers alike. In 2009, when the global financial crisis struck, households and businesses tightened their belts. Governments, by and large, did not.
A revealing example of this trend can be found in the Dominican Republic. President Leonel Fernandez engineered an impressive economic resurrection of the country from 2004-2008, regaining the confidence of investors. At the start of his second administration, as the global financial crisis raged, he negotiated a generous stand-by arrangement from the IMF and began an aggressive counter-cyclical spending program that kept the DR growing when most economies retracted.
However, the IMF expected the DR to wean itself off the Fund and return to balanced budgets by late 2011. With elections six months out, the Fernandez administration ignored the goals set by the IMF and accelerated spending in order to finish an ambitious list of infrastructure projects and help the Partido de la Liberacion Dominicana, his party, win the elections decisively. After achieving a budget surplus in 2007, the DR’s fiscal deficit in 2012 will reach close to 6 percent of GDP, most of that accumulated in the first 4.5 months ahead of the May 20 elections.
Across Latin America, government expenditure growth has outpaced economic growth. Today, government spending is greater than 32 percent of GDP versus 25 percent a decade ago. A good portion of the increase went into large scale infrastructure projects, the kind that can lift the productivity of a country or, just as frequently, line the pockets of the savvy few. In Peru, the region’s fastest growing economy over the last decade, the national Controller’s office estimates that the Peruvian government “loses” $3 billion per year due to corruption, or about 8 percent of all government spending. Some independent analysts estimate that true co-rruption figures are twice that level.
Around the world, voter tolerance for deficit spending relaxed in the face of an economic meltdown that threatened to rival the great depression. But the Keynesian model in Latin America too often leads to abuse. In June, 2012, The Economist magazine shed light on egregious overspending in Brazil. Politicians earning $400,000 per year on multiple pensions, head nurses earning $120,000 per year and elevator operators making $95,000 per year were some of the more colorful examples cited.
Articles like that of The Economist are beginning to shake public opinion out of complacency. In Chile, regarded as the least corrupt in Latin America, voters have grown cynical. In March 2012, a survey of working class Chileans found that 77 percent consider the Chilean government to be corrupt or highly corrupt. In Colombia, a new website (www.corrupcity.com), modeled after Farmville, encourages players to outwit one another and the tax payer en route to amassing a corrupt fortune. It appeals to a level of cynicism and public debate about corruption that never existed in Latin America before the digital age.
Transparency International, which has tracked corruption around the world for almost two decades, figures that corruption in Latin America over the last decade has worsened in three-quarters of the countries including Brazil, Mexico, Argentina, Colombia, Chile, Peru and Panama. The sad truth is that Latin American governments rarely make a dent in corruption unless they cut spending. That lesson ought to be taken to heart by the IMF and other lenders which helped stave off disaster in many of the region’s small economies in 2009. If corruption and waste is to be reduced in nations like Jamaica, DR and Costa Rica, then lenders like the IMF should insist on spending cuts, rather than inventing new taxes for these inefficient economies.
With Europe and China slowing down, commodity prices will remain soft for the next few years. Combine that with borrowing costs that have nowhere to go but up and it is clear that the era of easy money is over. Latin America must once again compete on a level playing field with far better managed economies in Asia, Eastern Europe, and the mid-East. After sitting on the couch for a decade, getting fat on Chinese largesse, it may be time to lose a few pounds, starting with some self-imposed fiscal austerity.
About the Author: John Price is the managing director of Americas Market Intelligence and a 20-year veteran of Latin American competitive intelligence and strategy consulting. firstname.lastname@example.org.