There is considerable turmoil in several Latin American countries including Brazil, Argentina and Venezuela. To gain some insight into what lies ahead in our southern hemisphere and the likely impact on business in the area, Global Policy Watch (GPW) spoke with Dr. Arturo Valenzuela, former Assistant Secretary of State for Western Hemisphere Affairs and Georgetown University Professor.

GPW: Dr. Valenzuela, we read about the winds of change sweeping through Latin America.  Is this a fair characterization?

Dr. Valenzuela: The current situation in Latin America must be viewed in the context of what has been occurring in the last 25 years.  A continent that was governed primarily by military authoritarian regimes is today governed by elected governments.  Extreme poverty rates have declined dramatically and greater prosperity has encouraged the rise of a new middle class.  That progress was aided by significant economic reforms, particularly the Washington Consensus, which opened up the markets and stabilized fiscal and monetary policies as well as structural policies that led do the privatization of state-owned enterprises.

GPW: Do you attribute this change to the end of the cold war?

Dr. Valenzuela: During the bipolar world dominated by the US and Soviet rivalry, leftist groups in many countries pushed a pro-Moscow agenda.  This led to fears of left wing insurrection aided and abetted by Cuba.  To head off communist insurrections, which in many cases were unlikely to succeed,  the military nevertheless took control, thwarting efforts to establish incipient democracies.  These authoritarian regimes were often encouraged and supported  by the US government, which sought to hold the line against Soviet expansion in the Americas.  With the end of the Cold War, this changed.  Constitutional government and the rule of law began taking hold throughout the region.  For the first time in history, in what came to be described as the Third Wave of Democratization, throughout the Americas countries either returned to well-honed democratic traditions, such as in Chile and Uruguay, or began the arduous task of fully implementing democratic constitutions adopted early in the 19th Century.

GPW: How did the Latin American economies perform during the decade of the 1980s under authoritarian rule and before the end of the Cold War?

Dr. Valenzuela: Horribly.  After the great depression, most countries in the region encouraged state owned industrial projects protected by high tariffs barriers.  This pattern of import substitution industrialization ran out of steam because it fostered inefficient industries shielded from international competition.  While major economies, such as Mexico did build an industrial base, they fell prey to economic stagnation coupled with hyperinflation.  For the most part authoritarian regimes, dominated by military establishments heavily intertwined with state owned corporations, combined economic mismanagement with dictatorial rule.

GPW: Let’s fast forward to the 1990s after the end of the Cold War.  What happened then?

Dr. Valenzuela: Military regimes gave way to elected governments strongly supported by the United States.  These governments sought to strengthen democratic institutions as they implemented economic policies aimed at stabilizing fiscal and monetary policy while encouraging economic development by opening markets.

GPW: Did those adjustments work?  What is the verdict in hindsight?

Dr. Valenzuela: The original reforms were necessary but not sufficient to improve the lot of average citizens.  Fortunately, governments in many countries went further by implementing innovative policies such as conditional cash transfers to alleviate extreme poverty while taking additional steps to improve social services and basic infrastructure, ushering-in an era of economic progress that reached sectors that had been historically marginalized.  Having said this, it is important to underscore that the consolidation of democratic institutions and the rule of law take time.  While classic military coups disappeared, with a couple notable exceptions, a series of elected presidents had to resign before their terms expired because of political deadlock with legislatures dominated by opposition forces in the face of growing civil unrest.  A new generation of leaders in several countries abandoned the discipline of careful economic management and sought in several countries to increase their standing by turning to populist measures that further weakened the progress of democratic consolidation.  Their irresponsible policies were temporarily papered over by the commodities boom that benefited the region.

GPW: How has China’s mushrooming economy impacted Latin America?

Dr. Valenzuela: Initially, China’s insatiable demand for commodities was a boon to commodity rich Latin America. For almost a decade, the economies of the Atlantic grew very quickly as a result of the mounting commodity prices mainly driven by Chinese demand.  Aided both by sound economic management and increased raw materials exports, the countries of Latin America managed to avoid the severe global downturn in the aftermath of the 2008 financial crisis that hit Europe and the United States; and the second decade of the new century looked bright for the Americas.  But what goes up has to come down and the sharp decline in Chinese demand for commodities, particularly oil, iron ore, copper and soybeans, has severely impacted Latin Americas economies.

GPW: Do you think the economic downturn will adversely affect the political situation in Latin America?

Dr. Valenzuela: The sharp drop in commodity exports has severely impacted growth in the region which contracted by 0.1% in 2015.  Lower commodity prices, financial volatility in financial markets, and lack of investor confidence contributed to further weakness in the first quarter of 2016 and it is likely to be negative for a second year.  The political effect of the economic downturn, however, has been disparate, affecting South American countries of the Atlantic more than those of the Pacific.  It has also affected the commodity exporters in South America more than the countries of Central America and Mexico whose fortunes have been more closely tied to the gradual but steady improvement of the US economy.

The situation is particularly dramatic in Venezuela where a collapse in oil prices coupled with a severe downturn in production has aggravated a string of poor policy choices, contributing to a severe economic downturn (-6.9%) with rampant inflation and heightened political instability.

In Brazil, it is not clear that President Rousseff will be able to finish her term in office because a corruption scandal tied to the State Oil Companies has shaken the country’s entire political and business establishment. The Brazilian economy is expected to contract 3.5%.  A side benefit to the Brazilian crisis is that it should help usher-in significant improvement in the rule of law.

The economic downturn was partly responsible for the election of a new government in Argentina that has taken giant strides to institute sounder economic management, rein in inflation, and make the country attractive again to foreign investment. Although President Macri’s recently elected new government faces many challenges, that change of government augurs well for a return to sounder economic management.

GPW: Dr. Valenzuela, what do you see as the bottom line going forward?

Dr. Valenzuela: Politically, governments are working to consolidate democratic institutions and the rule of law.  The progress, though slow, is a steady one that gives confidence in the future.  Economically, South America is a continent with huge opportunities for multinational businesses.  Natural resources are prevalent. Labor productivity is generally high and the competitiveness of the region  is increasing, particularly with the greater engagement of countries with the global economy based on platforms of free trade.  Latin America has another huge advantage.  As the oldest continuous independent republics in the world, each country’s nationalism is firmly entrenched.  There are no separatist movements driving people apart.  All of these factors point toward democratic consolidation and economic growth.