In April last year I caught up with Chile’s richest man, Sebastian Piñera , in the surprisingly modest Santiago office to which he returned after leaving the presidential mansion. A billionaire who made his money in the credit card business, Piñera served as president from 2010 to 2014, and he reflected on the defeat of his party after he stepped down, limited by law to one term. His center-right government had presided over an economic boom, with growth averaging 6 percent, yet his party was driven from power amid street protests against rising inequality. Supporters of the new president, Michele Bachelet, had promised to “take a bulldozer” to the Chilean model of lean government and low taxes. As we spoke, they were pushing for a bigger government, higher spending to help the poor and higher corporate taxes to pay for free university education. Chile’s shift under Bachelet reflected “the long history of Latin America,” Piñera said, with only a hint of frustration. “When times are good, countries turn to the left, and when times are bad, they turn to the right.”
It was only a few months later that Latin voters soon started to reverse the “pink tide,” which had seen a range of bright to light-red socialists rise to power in a dozen Latin countries, from Argentina to Chile, in the previous decade. The pink tide was supported by good times, as high global prices for commodity exports—soybeans in Brazil, oil and gas in Bolivia and Ecuador, copper in Peru and Chile—allowed socialist governments to support generous welfare spending. In 2015, however, as commodity prices plunged to multi-year lows, hard times came back with a vengeance in Latin America. Regionwide, economic growth turned negative, and inflation hit 15 percent, its highest since the currency crises of the 1990s.
The worst economic environment in a generation led to the fall of one left-wing government after another. The cascade began last November in Argentina, where zero growth and 25 percent inflation set the stage for the defeat of President Cristina Fernandez de Kirchner and her populist party. A month later in Venezuela, with inflation in triple digits, the opposition wrestled the national assembly majority away from the socialist ruling party, and pushed for a recall vote to depose President Nicolas Maduro. Approval ratings plummeted for once popular socialists like Bachelet and Ecuador’s Rafael Correa, who announced he would not run for a third term.
Soon after, the diehard anti-imperialist Evo Morales lost a referendum seeking the constitutional right to run for a fourth term in Bolivia. The next domino to fall was Brazil, where average incomes have contracted more sharply in the last two years than during the entire “lost decade” of the 1980s, and popular disgust helped fuel the removal by impeachment of President Dilma Rousseff of the Workers Party. And in Peru, voters bounced the ruling leftist party before the final round of the presidential election last Sunday, which ended too close to call, but with a slight lead for former prime minister Pedro Pablo Kuczynski, a center-right veteran of Wall Street, the World Bank and the International Monetary Fund.
The retreat of the left has triggered an intense debate in Latin America. Some experts highlight economic failures like overdependence on commodities and income inequality, others cultural failures like corruption in Brazil and Chile or the paternity scandal dogging Morales in Bolivia, still others the ideological excesses of zealots like Maduro, or their enemies. Morales recently joined with Cuba’s Fidel Castro in blaming American machinations for the string of leftwing defeats, and calling for a counter-revolution to save socialism in Latin America.
Without denying that specifically Latin factors are at play, I would suggest an explanation that puts the fall of the Latin left in a larger global and historical context. In my new book, The Rise and Fall of Nations, I narrow the many factors that can shape a nation’s destiny to the ten that matter most, based on a 25 year career as an author and global investor, studying historical patterns. In politics, the rhythm of nations follows a cycle that mimics the circle of life: crisis gives birth to reform, which triggers a boom in growth, which inspires a middle-age complacency, which kills reform and leads to a new crisis. The bigger the crisis, the more likely the nation will seek to topple old leaders and embrace newcomers who promise change. Since 2008—the worst global economic crisis since the 1930s—the world has been in the grip of a revolt against seated rulers. In Latin America, most of them just happened to be left-leaning.
Before the 2008 crisis, the global economy was booming, and incumbents were winning two out of three elections in the world’s major democracies. Since then, the incumbent parties have been losing as many as two out of three. The revolt continues boiling away because many economies have yet to recover from the crisis, and some—including those in Latin America—are only now seeing the worst of it. The revolt intensified last year, when eight populous democracies held elections. The challengers won five, from Nigeria to Poland and Argentina, and weakened the incumbent majority in two others. The fall of the left in Latin America is a microcosm of the global revolt that aims to throw the bums out.
It is in part anti-left, but its gut is anti-establishment. The common thread, from Venezuela to Argentina, is sinking economic growth, soaring inflation and stale regimes—ruling parties that had been in power much too long. Morales’s party had ruled for 10 years, Kirchner’s for 12 years, Rousseff’s for 13, Maduro’s for 17. Even the most promising leaders tend to grow complacent with time, running out of ideas and will to reform.
Consider how the circle turned in Brazil, the region’s largest economy. The Workers’ Party came to power in 2002, and for much of the decade presided over a run of reasonably strong growth, with President Lula in office. His government funneled the profits of the commodity price boom into successful welfare programs that eased poverty and built the middle class. But Lula also understood that inflation had toppled many of his predecessors, and his government maintained a steady budget surplus to contain that threat.
In his later years, however, Lula started showing the usual symptoms of complacency and excessive self-regard. In 2009, when the global financial crisis was devastating many Western nations but not yet the emerging nations, Lula began to crow about how well Brazil was doing. When Rousseff succeeded Lula as his handpicked Workers Party successor in 2010, she kept doing what he had been doing, even further increasing government spending, though the global economic backdrop was changing dramatically. Rousseff funneled more money into welfare programs, though revenue from commodity exports had started to collapse, and the budget fell deep into the red. Desperate to fight the downturn, she ordered state banks to increase lending, and their share of total lending exploded from 34 percent to nearly 60 percent.
Under Rousseff the welfare state continued to grow and Brazilian government spending now amounts to 40 percent of GDP, a scale on par with much richer nations in Europe. This is an indulgence that no poor nation can afford and it is retarding economic growth. Inflation has returned, and the average Brazilian income has fallen to $8,000, down from $13,000 in 2011. Brazilians started marching by the millions against Rousseff and the entire political establishment as early as 2013, and her impeachment, though technically based on her alleged manipulation of the state banks, just put a bow on the growing package of grievances.
To be fair, Brazil’s underlying pathologies predate Rousseff, whose main sin was to make them worse. Even under Lula, Brazil did nothing to diversify its economy away from commodities like soybeans, which now account for two thirds of exports, up from less than half in 2000. The addiction to windfall commodity profits is at the heart of the “car wash” investigation now roiling Brazil’s elite, which involves money allegedly funneled from the state oil company, Petrobras, to leading politicians. Even Lula, who left office a national hero, is now a suspect. But the basic problem of commodity dependence was weighing on Brazil long before Lula, indeed long before the Workers Party was founded, back in 1980.
In fact no Brazilian leader has done much to address it. Since 1914, Brazil’s economy has always risen and fallen closely in line with global commodity prices, which went through boom and bust spurts but remained essentially flat over that entire period. The result is that Brazil today is as poor relative to United States as it was a hundred years ago. This is how the circle of life turns, lurching from crisis to crisis, dust to dust, leaving many countries stuck in place. For Brazil to break out of this static pattern would take the rise of an unprecedented reformer, a Deng Xiaoping of Latin America.
This, then, is a fateful moment. In the wake of a crisis as large as 2008, nations come to a fork in the road. Some choose the path of reform, others fall for populist demagogues. The crises of the 1930s brought to power reformers like Franklin Delano Roosevelt, and demagogues like Adolf Hitler, a pattern that has played out many times since. In response to the currency crises of the 1990s, for example, Venezuela turned to Hugo Chavez and his “21st Century Socialism,” under which Venezuelan incomes continued a half-century of decline. Others turned to reformers. Brazil elected Lula, who at least exercised budget discipline for a while, and Colombia elected Álvaro Uribe, a right-wing populist who not only put the books in order but also managed to quell the guerrilla uprisings that had been the chief obstacle to growth in the economy.
Today the world is at a similar post-crisis decision point, with a choice between reformers and a rising cast of angry populists. Compared to Latin America, the United States and parts of Europe are in better economic shape. Surprisingly though, some of these countries are leaning toward neither reformers nor establishment figures but to angry populists. Simmering frustrations over stagnant wages, a fear of immigrants stealing jobs and foreign competition is helping to fuel the rise of populists like Donald Trump. In Europe, the angry right took over the government in Poland last year, and nearly took the presidency in Austria last month. So far the center has held, but in Britain, France, and Germany, the far right parties have grown from marginal to less marginal. These parties are often led by flamboyant Trump-like characters, and the attention they draw has overshadowed the rise of reformers, like Prime Minister Matteo Renzi of Italy.
While Latin America is plagued by more severe economic problems, on the political front the news is more encouraging. In Argentina, after last November’s landmark election, Mauricio Macri got started with big bang reforms. He lifted capital controls, removed tariffs on farm exports, and eased subsidies on power and water. Macri brought in a new chief for the central bank and vowed to restore its independence, which is critical for the fight against inflation. He fired government statisticians who had been accused by the IMF and others of cooking Argentina’s economic data, and settled nearly $10 billion in unpaid debts, lifting Argentina out of default and restoring its access to global credit markets after 15 years in the wilderness.
From Argentina to Peru and Brazil, the business communities are celebrating the arrival of new governments. This is good news because they are in the main pragmatic reformers and not angry populists. Kucyzinski is a low-key former finance minister who has promised to rule by consensus, clean up corruption and revive growth. Rousseff was replaced by her vice president, Michel Temer. Though dogged by low popularity ratings himself, Temer came in talking a good reform game and appointing competent aides, and is seen as a stabilizing transition figure as Brazil moves on to new elections in 2018. The people, and the markets, are relieved that Rousseff has been thrown out.
It is too early to say whether any member of this post-crisis generation will be remembered as a success, because good policy needs a boost from good luck. Today, all the newcomers have the bad luck of arriving amid the weakest global recovery in post-war history, and face the challenge of reviving domestic growth in these difficult conditions. Still, the fortunes of a nation are most likely to turn for the better when a new leader rises in the wake of a crisis, and today voters are throwing the bums out all over the world. That is a promising shift in the circle of life, particularly in Latin America.
Sharma is chief global strategist and head of emerging markets at Morgan Stanley Investment Management. This piece is adapted from his new book, The Rise and Fall of Nations: Forces of Change in the Post-Crisis World