Why populism will likely prolong economic pain in Brazil, Mexico

With Latin America now more than 50 days into pandemic lockdown, it is becoming clear that the decisions by populist governments in Brazil and Mexico have exacerbated COVID-19’s economic impact and heightened their chances of an L-shaped recovery, according to two economists. 

L-shaped recoveries - marked by a sustained depression at the end of the initial contraction - are something feared by all Latin American governments today, with many countries working hard on the stimulus front to facilitate the faster V-shaped recoveries.

Asked by BNamericas whether the policies of Mexican President Andrés Manuel López Obrador (AMLO) and President Jair Bolsonaro in Brazil were driving the risk of hitting L-shaped recoveries, the senior economist for Latin America at Continuum Economics, Pedro Tuesta, said: “The short answer is yes.” 

 “The main issue is their reluctance to accept that the pandemic affects everybody. In Brazil there is the patriarchal side of populism in which ‘we’ are stronger that the rest and ‘we can endure the virus best,’” said Tuesta in an email to BNamericas. “This belief is shared by Mexico’s president although not to the degree shown by Bolsonaro, who seems to follow Trump’s ideas closely.”

The following graphic, provided by Continuum Economics, details the baseline track of the Mexican and Brazilian GDP, which assumes distribution of an effective vaccine by mid-2021. The L-shape curve is visible with both tracks.

 

In a recent analysis piece, Tuesta wrote that Bolsonaro’s belief that Brazilians are better able to ride out the pandemic due to some innate immunity ignores the risk of the health system becoming overwhelmed. 

“More importantly, this argument ignores the risk of the virus becoming endemic,” wrote Tuesta. “In such a scenario, the rest of the world would probably cut Brazil from industries like meat exports and tourism, jeopardizing the country's recovery, as Brazilians would be unable to return to any sense of normalcy.” 

Mexico’s problem of populism is perhaps even more urgent, according to Alfredo Coutiño, head of Latin American economic research at Moody’s Analytics.

“Brazil and Mexico are two cases of populist leaders, but with a radical difference in terms of the political philosophy. While in Brazil Bolsonaro comes from the orthodox right, AMLO comes from the radical left,” Coutiño said in an email to BNamericas. 

“AMLO rejects and Satanizes neoliberal policies even though the fiscal policy is fully managed according to the neoliberal framework,” Coutiño said in reference to AMLO’s unique flavor of populism that attacks neoliberalism but adheres strictly to the orthodoxy of a primary fiscal balance and strong spending controls.

Since coming to power AMLO has more directly attacked the corruption that plagued previous administrations and the tendency of his predecessors to disregard the reality of poverty in the country, issues that fueled AMLO’s landslide victory in 2018.

But the Mexican leader’s dogged refusal to listen to the current plight of the private sector and a cabinet packed with die-hard supporters are factors that make Mexico exceptionally vulnerable in the pandemic crisis, both economists argue. 

“This makes Mexico not only a less favorite market for investors but also a more vulnerable economy,” Coutiño said. “In addition, AMLO has reiterated that economic growth is not important, but rather social well-being, but he forgets that economic growth is a necessary condition to promote well-being” 

“If he does not generate growth, then the economy will be condemned to run with imbalances and consequently with poor growth and null improvement in well-being,” he said. 

Tuesta, in a webinar on populism’s impact on Latin America during COVID-19, pointed to AMLO’s negative attitude towards business as behind his near-total lack of economic support to the private sector in the ongoing crisis.

“The private sector has done almost everything to convince the president to help them, presenting many ways that the government can help the private sector, but López Obrador has dismissed all the efforts,” said Tuesta.

AMLO has only shifted the budget towards his own pet projects, “leaving the private sector to fend for itself,” said Tuesta.  

The following graphic shows fiscal stimulus as a share of GDP in key economies in the region: 

 

“López Obrador’s underlying belief is that helping the private sector is wrong because they benefited from corruption in previous governments,” Tuesta said on the webinar.

“The president’s attitude will increase the persistence of the shock … and will lead to a weaker recovery not only in 2021, but probably for many years to come.”