Why did Hugo Chávez win last October’s presidential election so resoundingly? One simple answer is that he spent his way to re-election. In the run-up to the vote, government spending increased by a whopping 25 per cent, and that’s in real terms. No wonder Venezuela is now suffering from a yawning fiscal deficit and has just devalued.
But what about the rest of the region? After so many decades of populist-fuelled booms and busts, has it finally brought the political-cycle to heel? Beyondbrics wrapped a cold towel around its head and examined the statistics. Not every country passed.
Source: FT research, Datastream | view chart via Excel
Perhaps surprisingly, Argentina is in the same league as Venezuela. President Cristina Fernández increased government spending, also by 25 per cent in real terms, in the run-up to the 2011 presidential vote. No wonder she was re-elected by a landslide too. And no wonder the country’s macro-economy is now suffering from increasing distortions, including a gaping hole between the official and black market exchange rate. The bill for past profligacy has come due.
More surprising is how Brazil kept its foot on the fiscal gas in 2010, when government spending rose by 21 per cent in real terms. That helped ensure the election victory of Dilma Rousseff, at the time a near unknown (although she was the anointed favourite of former president Luiz Inácio Lula da Silva). But it is surely no accident that Brazilian policymakers soon after started to complain about the over-valued currency. Whip out the ol’ Mundell-Fleming economic model from your student days, and a fiscal boost always contributes to a higher exchange rate. One of the first bullets in the “currency wars” was fired by Brazil.
The rest of the region has been more careful – although no Scrooge. Colombia boosted government spending by 7 per cent in real terms before its presidential elections in 2010, Peru by 12 per cent in 2011, and Mexico by 11 per cent in 2012. That is relatively modest compared to the spendthrifts. It also suggests a welcome willingness to spread some of the wealth around. But it is still pro-cyclical, and suggests spending discipline may have loosened.
Lastly, what about future elections? The next is in Ecuador this weekend. There President Rafael Correa has been increasing government spending at 14 per cent, in real terms. This will doubtless help his re-election – and his chances of assuming Chávez’s fallen crown as “King of the Latin Left”. Still, take the pre-teen percentage point increase in spending of Mexico and the like as “best in class”, and leftist Ecuador is not quite there. Still, it is better than any Venezuelan or Argentine style blowout. It also suggests a smoother economic journey for Correa during his next term than either Chávez or Fernández have endured.
Chávez devalued, FT
Currency fear spread in Latin America, FT
Chart of the week: EM currencies, winners and losers, beyondbrics
Colombia, Peru and Costa Rica join currency war, beyondbrics