Forecast: Latin America in 2010

I’ve been comparing notes with my colleague and close friend Nouriel Roubini on political and economic expectations for a few key regions in the year ahead — a back and forth that’s resulting in a global forecast for 2010. 

Today, we begin with Latin America.

Ian Bremmer: I do think we can expect a solid recovery in Latin America in 2010, as most governments in the region profited from sharply improved macroeconomic fundamentals to survive the slowdown with minimal damage. But a busy electoral calendar over the next two years, highlighted by Brazil’s presidential election in October, will tempt policymakers to inflate their political popularity via heavy state spending. Governments like those in Brazil, Mexico, Chile, and Peru will benefit from the sound macroeconomic policies of recent years. Political officials in places like Argentina, Venezuela, and Ecuador may find their popularity built atop shifting sands. The Cristina Fernandez de Kirchner government in Argentina, faced with rising inflation and an increasingly hostile congress, will prove especially vulnerable.

The really interesting story this year is in Brazil, where oil wealth and President Lula’s popularity have seduced the government into less disciplined macroeconomic policy and a more statist approach to foreign investment and strategic economic sectors. Lula’s preferred presidential successor, Dilma Rousseff, should be considered a slight favorite to win. If she does, she’ll deepen state involvement in Brazil’s economy. If opposition candidate Jose Serra wins, we’ll see less bias toward state-owned enterprises and tighter fiscal policy. Whoever wins, there is one obvious wide-open sector for foreign investment: transport infrastructure. There’s a lot of work to do to prepare Rio for the World Cup in 2014 and the Olympics in 2016.

Nouriel Roubini: Latin America is divided between economies that follow market-oriented policies (while attentive to social issues) such as Brazil, Chile, Uruguay, Colombia, Peru, and more populist governments in Venezuela, Bolivia, Argentina, and Ecuador. The latter group maintained its political popularity and solid economic performance given that commodity prices recovered, but some of these regimes are fragile and weakening. Venezuela’s recent devaluation is a signal of a seriously mismanaged economy; in Argentina, the popularity of the Kirchner duo is faltering and the next president — whoever he may be — is expected to be more moderate and market friendly; Ecuador’s Correa populism is kept in check by the popularity of dollarization.

Even in market-oriented economies, important structural reform challenges remain. In Brazil, Lula maintained macro stability (sound fiscal policy and independent central bank but with some recent slippages in fiscal discipline), but he failed in implementing structural and micro reforms that would accelerate the potential growth of Brazil. Implementation of those reforms will depend on whether Jose Serra or Dilma Rousseff is elected president. In Chile, Pinera will have to work hard to ensure that more aggressive market-oriented reforms don’t lead to a return to greater income and wealth inequality.

Throughout Latin America, democratic transitions require that presidents (i.e., Uribe, Lula, Correa, and Chavez) avoid tinkering with constitutions and electoral laws to seek endless terms in power. Otherwise, the nefarious regional tradition of strongmen and caudillos will return. Alternation of power is necessary to strengthen democratic institutions.

Ian Bremmer is president of Eurasia Group. Nouriel Roubini is a professor of economics at New York University’s Stern School of Business and chairman of RGE Monitor.