Cryptocurrency: For When Interventionism Fails

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Latin America's Slow Descent Into Interventionism

Authored by Daniel Lacalle,

The latest estimates from consensus for the main Latin American
economies show a continent facing a lost decade. The region GDP growth
has been downgraded yet again to a modest 1.1% for 2023, with rising
inflation and weakening gross fixed investment. Considering that the
region was already recovering at a slower pace than other emerging
markets, the outlook is exceedingly worrying.

The poor growth and high inflation expectations are even worse when we
consider that consensus estimates still consider a tailwind coming
from rising commodity prices and more exports due to the China
re-opening.

How can a region with such high potential as Latin America be
condemned to stagflation? The answer is simple. The rise of populist
governments in Colombia, Chile and Brazil have increased the concerns
about investor security, property rights and monetary discipline.

Argentina is expected to post a modest 0.2% GDP growth in 2023 with
95% inflation and a debt to GDP of 72%. Years of monetary and fiscal
excess have destroyed the purchasing power of the local currency and
dilapidated the prospect of real growth. In Argentina, poverty has
escalated to 36.5% of the population and the government policies
double down on interventionism, price controls and higher taxes with
the expected negative result. Despite the tailwind of high demand for
soja and cereals globally, Argentina dives deeper into Venezuela
territory, where consensus expects another year of weak 3% bounce
after destroying 80% of the output in a decade, with enormous
inflation, 132%.

The problem? The new governments in Chile and Colombia are announcing
policies that resemble those of the “Peronist left” in Argentina and
the Fernandez government in Argentina is looking more like Maduro’s
Venezuela each day.

Chile is expected to post no growth in 2023 despite an estimated
higher copper price, and 15% inflation. Colombia, which showed the
strongest recovery from the covid-19 crisis until 2022, in which
consensus expects a 7% growth, is feared to stop on its tracks and
deliver a poor 1.6% GDP growth with elevated inflation, close to 7%.

In Brazil, consensus expects a poor 0.9% growth with 5% inflation. It
does not look as bad as Argentina, but the first major announcement of
newly elected president Lula has already triggered all alarm bells.
Lula stated that he wanted to change the constitution to lift the
spending limit and increase government spending even more. The Brazil
currency and 10-year bond reacted aggressively to this risk because
everyone can remember that Lula’s “economic miracle” a decade ago came
from massively high oil prices and, when the commodity bonanza ended,
his successor Rousseff sent the country to a deep crisis where
spending soared and growth stagnated.

You may say that the rise of populism in Latin America is the
consequence of the failed classic liberal policies implemented before,
but that would be a grave mistake. Most of these countries have not
seen open and liberal economies but crony states. Statism failed and
more statism fails even faster.

Global investors see the enormous potential of Latin America. However,
when governments start to impose interventionist policies, put at risk
property rights with expropriation threats and at the same time
massively increase monetary imbalances printing currencies with no
real global and diminishing local demand, the combination is
destructive.

Why do citizens vote for politicians that implement confiscatory and
extractive policies? In many economic debates in Latin American media
one can hear the word “redistribution” repeated incessantly. Many
believe that wealth is like a pied that can be cut and distributed at
will, but ignore that wealth is either created or destroyed, it does
not stay flat.

Interventionist policies destroy wealth in three ways: First,
attacking independent institutions and introducing political random
decisions in legal and investor security which erodes growth
potential, investment, and employment. Second, by increasing taxes on
the productive sector to pay for massive subsidies paid in a
constantly depreciated currency, which creates a double negative of
lower growth, weaker local businesses and a dependent subclass that
rarely emerges. The productive sector ends forced to operate in the
underground economy to avoid confiscatory taxes. Third,
interventionism destroys the purchasing power of the local currency by
breaking all the rules of prudent monetary policy and financing an
ever-increasing government size printing a constantly devalued
currency. The combination of these three factors means poverty and
stagnation.

Why do interventionist governments do this when they know -and they
do- it does not work?

Monetary destruction is the easiest and most effective way of
nationalization of an economy. Printing currency is a form of
expropriation of wealth, as money creation is never neutral, it
benefits the government and hurts real wages and savers.

Why would “populist” governments impose policies that perpetuate
poverty and hurt the people? Interventionism does not aim to increase
prosperity but take full control of a nation. The three mentioned
policies are aimed at grasping full control of a country and make the
population dependent, not deliver growth and improve social
conditions.

Extractive and confiscatory policies are not social measures, they are
profoundly anti-social. The worst is that once implemented, it becomes
difficult to unwind. We should learn the lesson everywhere because it
is coming to your country soon.