Argentina

Markets welcomed the International Monetary Fund’s (IMF) $50 billion rescue stabilization package last week, which seems to be stabilizing the peso. But the financial umbrella will be costly. Rightly or wrongly, Argentines blame the IMF for precipitating their country's worst economic crisis. In the eyes of many voters, the mere association will damage President Mauricio Macri’s standing. As detrimental, the IMF entrance means an end to the economic gradualism of the last two-and-a-half years: Macri's strategy of trying to right the policy wrongs of more than a decade of mercurial rule by his predecessors while avoiding the political pain of austerity. Despite the public messaging that Argentina will make the decisions, and that social policies will remain in place, the new economic constraints accompanying the package threaten the political future of one of Latin America’s most market-friendly leaders. Macri’s fate shows how hard it is to recover from economic populism. Despite a deep bench of technocrats and broad societal support for change, Argentina’s structural flaws remain, hampering growth, productivity, and competitiveness. Gradualism achieved some real results. Macri freed the exchange rate, eliminated capital controls, and reduced agricultural export taxes. He rebuilt the statistics agency, gave the Central Bank back its autonomy and opened up infrastructure projects to private investment. He began to tackle the gaping budget deficit by hiking utility prices, re-calculating pension benefits, and resolving a protracted dispute over financial transfers to the provinces. All of these market-affirming steps were incremental—slowly reducing distortions of quotas, subsidies and other taxes, and trimming or re-orienting government spending. And they were complemented by millions more in social assistance and by billions more in public investments. The economy bounced back. By the second half of 2017 construction was flourishing and manufacturing recovering. Inflation finally started to decline. What didn’t change was the government’s need for cash, as economic gradualism required lenders to keep it afloat. After resolving claims from Argentina’s debt default saga, Macri’s administration swiftly became one of the most active international emitters—placing more than $100 billion in debt. Yet now, hit by a global investor pullback from emerging markets, the worst drought in three decades and a few homegrown political stumbles, Argentina is again being forced onto a more orthodox economic and financial path. With the IMF back in the picture, inflation will have to come down faster. This means the Central Bank will keep interest rates higher for longer, choking the incipient economic recovery. The deficit, too, has to be cut more drastically. Infrastructure spending that might otherwise spur growth will take a hit. But the real budget-buster is public sector employment, which grew under the Kirchners to represent nearly one in three jobs. To balance accounts, Macri will have to take on government workers. And voter patience is finally wearing thin. Since his victory in the October 2017 midterm elections, polls show Macri losing ground; fewer than half of Argentines approve of him or his government. Economic austerity will further erode this base. The crisis has become a rallying point for a deeply divided opposition. For the first time since Macri came to office, Peronist and Kirchner congressional delegates have teamed up, passing a bill that lowered utility tariffs back to November 2017 levels and forcing the president into an uncomfortable veto. Macri and his team still have 16 months before the next presidential election. The economic pain could fade before voters truly contemplate their vote. A push for concessions and other infrastructure partnerships could let private investors pick up some of the public-sector slack, lessening the cost to jobs and growth. And while the opposition shows signs of coalescing, it is far from uniting around a candidate to challenge Macri in the 2019 election. Macri’s stumbles also highlight the systemic destruction economic populism reaps. Debt can be renegotiated, currencies devalued, and other one-time shocks absorbed and overcome. But the entrenched political clienteles created by subsidies, quotas, bloated public payrolls, and other forms of political patronage are much harder to break up. Public largesse in the form of expanding benefits and entitlements become both unassailable and unsustainable. Even the ways of doing business change the calculus of the profit-minded, at least in some sectors, to favor rent-seeking over market-based competition. To reverse these pernicious shifts requires more than one presidential term. Sadly, Argentines may not grant Macri’s Cambiemos coalition the benefit of the doubt. View article originally published on Bloomberg.

The Union of South American Nations (UNASUR) — an organization that once aspired to become South America’s answer to the European Union — quietly faded away last month. Deep divisions over Venezuela’s turmoil and internal leadership battles precipitated its demise. Yet its real vulnerability stemmed from something deeper: the economic isolation of its members. Unlike the European Union, Latin America’s multilateral bodies haven’t ignited commercial ties between their participants. This economic detachment not only doomed UNASUR, but has held the region back, and may keep it on the margins in the decades to come. UNASUR wasn’t the first attempt to integrate Latin America. In the 1960s the six-country Latin American Free Trade Association fell victim to protectionism. In the 1980s, a dozen nations tried again with the Latin American Integration Association, largely to no avail. In the 1990s Mercosur took center stage as a vehicle to knit South America together: Its common currency never materialized, and trade between the partners peaked shortly afterward, then again declined. Despite more than a dozen different multilateral organizations, Latin American nations remain commercial strangers. Sure, Argentina and Brazil exchange some auto parts, Colombia and Ecuador do a decent trade in paper and plastics, and Chilenos watch Mexican soap operas. But overall, less than 20 cents of every export dollar goes to one of its neighbors. Compare that with well over half of international sales in Europe or Asia. More broadly, Latin America’s regional agreements have done little to boost their members’ share of world manufacturing exports and their participation in global markets. Importantly, Latin American nations tend not to make things together. Today the vast majority of goods circling the earth are intermediary goods — parts and components being sent elsewhere to be sewn, welded, stamped, and otherwise assembled into clothes, cars, computers and thousands of other products. This shift in trade reflects the rise of global supply chains, as everyday products are increasingly made across numerous factories and even countries. These supply chains have bolstered the fortunes of many emerging markets — mostly when they worked with their neighbors. Asia’s big four newly industrialized economies — South Korea, Taiwan, Hong Kong and Singapore — jump-started their decades of near double-digit growth with Japanese outsourcing and investment. They later benefited from China’s rise. Many Eastern European nations saw their industrial base and larger economies blossom when their Western European brethren poured in after the fall of the Berlin Wall. And Mexico’s successes in cars, planes, medical equipment, and other manufacturing has been due mostly to the commercial ties born of NAFTA. Latin American nations are instead largely focused on mining the iron ore, lithium, copper and other raw materials that go into the making of steel, batteries, and electronics; or growing the soybeans, fruit, and coffee processed and consumed oceans away. Excluded from the most dynamic parts of international manufacturing chains, Latin American companies and workers are less likely to gain access to new technologies, to develop new skills and to move up the value-added ladder to higher-margin products and better-paying jobs. This isolation leaves the region less able to compete vis-a-vis other parts of the world in the making of things — not least because of the rise of other more successful regional hubs — and less able to attract global consumers to its homegrown brands. It helps confine so many nations to the middle-income trap. Without the commercial ties to keep the politics on track, diplomatic conflicts often lead either to neutered talk shops unable to resolve pressing issues — the Organization of American States’ response to Venezuela comes to mind — or to full-on institutional suspensions, a la UNASUR. Given the distances involved, South America is unlikely to be drawn into Asia’s, Europe’s or North America’s manufacturing orbits. Its nations instead should turn to their neighbors to nurture industry and boost economic growth. The legal mechanisms are there: More than two dozen regional agreements cover some 80 percent of trade. These could be expanded to include the thornier sectors that remain, and could and should be consolidated into a few broad agreements — for instance, expanding the Pacific Alliance to streamline the current thicket of rules and regulations. Governments could also make it easier for international companies to invest through tax and investment treaties with neighbors. They could tackle the outsized transaction costs shippers face from woeful infrastructure between countries. And they could reduce excessive red tape and strengthen the rule of law, enticing to any foreign investor or multinational. If Latin American entrepreneurs and businesses looked next door more often, they would finally provide a stronger economic foundation for the wider integration politicians have long discussed but never realized. View article originally published on Bloomberg. 

As the warm winds return, the days lengthen and the jacaranda trees explode in a riot of purple along its main avenues, Buenos Aires is also enjoying the afterglow of President Mauricio Macri and his Cambiemos coalition’s resounding October win. All the big cities and provinces went their way -- the first time a party has swept the national electoral field since Argentina's return to democracy in the 1980s. The midterm election upended two constants of Argentine politics. The first was the idea that a business-oriented party can’t compete. Macri and his coalition have now won twice, and gained national traction with time. The second is that the Peronist party, the dominant political force of 20th-century Argentina, can’t lose. Yet it collapsed. These two seismic political shifts are partly the result of savvy leadership. But they also reflect fundamental shifts in Argentina’s economy and society. For one hundred years, since Argentina introduced the secret ballot in 1912, the only way the capital class came to power was through voter fraud or military coups -- of which there were six in the subsequent years. Even the middle-class oriented opposition Radical party couldn’t hold the executive office for long -- every one of its democratically elected presidents was ushered out early, either by a military escort or a market meltdown. Cambiemos has defied this truism because so far it hasn't acted like a business party. While pro-market, it isn’t neoliberally austere. Instead, like its populist predecessors, it has supported social programs, unemployment benefits and pension payouts to lessen the blow of stagflation for the average voter. Macri and his team have gone further, spending big on infrastructure projects.  Ubiquitous yellow signs hover every few blocks next to piles of dirt, slabs of concrete, reams of steel rods and pots of paint, touting repairs to broken sidewalks, darkened street lamps and blackened buildings.  The biggest bet and electoral payoff have come from the new Metrobus, dedicated lanes on the capital’s main boulevards that snake out dozens of kilometers into wealthy and humble enclaves alike. While a similar public transportation roll-out caused havoc in Chile in 2007, tanking President Michele Bachelet's approval ratings, everyone in Buenos Aires raves about the new system, which has cut some rush-hour commutes in half. This was good government backed by good marketing. A vast staff within the Casa Rosada scoured databases and polls, targeting electoral appeals street by street, ultimately turning a sea of Peronist blue municipalities Cambiemos yellow. Yet Macri’s win also came from Peronist failures. The movement has all but disintegrated, its factions losing ground in the midterms. Part of the problem is its leadership, or lack thereof. Despite her legacy of economic malpractice and deep ties to corruption, former president Cristina Fernandez de Kirchner remains its standard bearer, the most visible and popular among the unpopular. But Peronism’s slide into irrelevance also reflects a failure to adapt to structural economic change. For decades, Peronism relied on a winning electoral alliance of urban unions and rural bosses. Its pillars began to wobble in the 1970s, as offices displaced factories and the countryside began emptying out, draining the votes that rural political machines could deliver.  In the 1990s Peronist president Carlos Menem tried to adapt, opening markets, attracting private sector investment and courting the growing middle class. The 2001 economic crisis stopped this internal political evolution even as it accelerated the underlying economic shifts. After much turmoil, the nation finally settled into more than a decade of Kirchner rule—first Nestor, then his wife Cristina – from 2003 to 2015. Together they forced out their modernizing colleagues and returned to a populist economic playbook based on protectionism, clientelism through massive social programs and a government hiring spree. These efforts bought the loyalty of the nearly million Argentines who lost their living when GDP plummeted 20 percent, but they didn’t bring back organized labor. And the high export taxes they introduced on soy, beef and other agricultural products enraged Peronism's once loyal rural base. When the economy turned -- dragged down by profligate public spending, limited investment, rampant inflation, the commodity bust and a good dose of corruption -- it left the party decimated. Macri today has enviable approval ratings. Yet the president can still easily stumble. Despite an initial big bang of reforms -- floating the currency, resolving the debt issue with international holdouts, re-creating an independent statistics agency and lowering some public subsidies -- the government has yet to make many of the hard choices necessary to put the nation on a sustainable path. Fixing potholes and creating new bus lines are all well and good; but that won't drag Argentina into the 21st century. At some point, Macri's coalition will have to put forward its plans to take on the nation’s deep-seated economic dysfunctions. This starts with the cash economy. Few places beyond tony boutiques and restaurants welcome credit cards, and purchasing big ticket items such as cars and homes still involves suitcases stuffed with bills. The “blue market” peso-dollar exchange continues. After a fruitless trip to five cash machines, I used the hotel’s favored money changer -- a woman in her thirties in a white top and jeans with meticulously folded 100 peso bills -- for walking around money.  She let me know that I’d get a better rate next time if I brought $100 Benjamins instead of my lowly $20s. All of this informality means wasted time and limited sales, and in the aggregate curtails the upside of the current economic bounce. If the economy doesn’t grow, Argentina’s patience with the president and his coalition will grow thin. More fundamentally, Argentina remains uncompetitive. A decade without foreign direct investment has left it technologically backward.  Instead of the automation occurring in other emerging economies, labor redundancies are baked into even quotidian tasks. Buying a single cortado (coffee) took no less than two transactions, three lines and five people. This is not how a future economic powerhouse functions. And the government mantra of gradual change depends on outside financing. While global liquidity and low interest rates have provided the $40 billion a year cushion that Argentina needs so far, the last non-Peronist government went down in economic flames when international funding disappeared. Argentina, like all democracies, needs an opposition. With almost a third of Argentines living in poverty, there is plenty of room for a left-leaning party. But to return to power, the Peronists can’t go back to their roots. They need new leadership and new ideas. Here, the party’s longstanding ideological flexibility can be a strength. Who knows, as Peronism searches for a winning platform, it could just be the balanced budgets, labor flexibility and economic openness that Macri's government has yet to embrace. Click here to view article originally published in Bloomberg View.

Scholars of Latin America spent much of the first decade of this century discussing the causes and consequences of the region's turn to the left, under Venezuela's Chávez, Argentina's Kirchners, Brazil's Workers' Party, and other variants of leftist parties. It was therefore perhaps not surprising that as the left began to lose power in the second decade of this century, journalists and academics began to talk of the region's tilt to the right. But looking across South America's political landscape, it becomes apparent that the region hasn't really turned toward right-leaning politics as much as it has chosen deadlock. In country after country, the president is governing with either minority support in Congress, or will be perilously close to doing so after upcoming elections. In Peru, Pedro Pablo Kuczynski (PPK) narrowly won the presidency over Keiko Fujimori, but her Fuerza Popular party gained 56% of Congress. This majority, combined with the divided Left, has empowered the Fuerza Popular to block PPK at every turn, including by removing PPK's ministers or forcing them to resign. Argentina's President Maurício Macri was able to move forward on a variety of reforms in his first year, but now faces a rockier outlook. Four months away from midterm elections that will be crucial to the fate of his market reforms, the ever-surprising former president, Cristina Kirchner last week announced that she was founding her own Unidad Ciudadana party, and declared herself a candidate for an open Buenos Aires Senate seat that she will contest against a close Macri ally. As one local pundit summarized the situation, Macri needs to defeat Kirchner to finally become president and convince investors fearful of a return to populism; Kirchner needs to destroy the Macri presidency if she is to have a political future. The midterm elections are widely thought to be a bellwether for the 2019 presidential election, but although some Macri gains are anticipated, it is not clear such gains would lead to a change in the balance of power in Congress that would enable Macri to move as quickly and surely on reform as he might wish. Brazil's stand-in president, Michel Temer, has lost all capacity to govern the fragmented Congress, whose members are running scared of losing their heads either from the sword of justice or the scimitar of popular disgust.  After some initial success on fiscal reform, social security reform is back on the back burner, labor reform has been narrowly blocked in committee, and tax reform, political reform, and other significant changes are a distant mirage. In Chile, Michelle Bachelet's approval ratings have been improving of late, and she hopes to move forward on same-sex marriage and infrastructure investment plans in her remaining months in office. She may yet do so, but her successor will likely have a harder time of it. Polling in the presidential election continues to tip between Chile Vamos' Sebastián Piñera and the Nueva Mayoria's presumptive nominee, Alejandro Guillier, who have each polled in the 20 to 25 percent range in recent months. The 155-seat lower house, and 23 of 50 Senate seats, are also pending in the November elections. Concomitant elections for the executive branch and much of the legislature may ensure the presidential winner has some legislative coattails. But the extreme fragmentation of this year's primaries, the breakup of the old anti-authoritarian coalition, declining voter turnout, and simmering protests raise questions about the political system's ability to manufacture a convincing legislative majority. This may matter less in Chile than in some parts of Latin America, given the broad Chilean consensus around economic policies, but it does suggest that governance under the next president will not be an easy matter. In Colombia, former presidents Álvaro Uribe and Andrés Pastrana are doing everything they can to make certain that the election campaign is polarized around the peace deal, thus continuing the back-and-forth between those critical of the deal and supporters of President Juan Manuel Santos' effort. The initial candidate of Uribe's Centro Democrático party, Oscar Ivan Zuluaga, has had to withdraw due to allegations in the Odebrecht case, but that does not seem to have weakened the "no" side's resolve. The more that fissures around the peace deal dominate the 2018 election cycle, the less likely that other issues will become a matter of debate. In a political landscape in which former vice president Germán Vargas Lleras leads, but no other candidate is yet a clear second-place contender, emphasizing the shortcomings of the peace deal makes strategic sense. But the longer-term upshot may be a deepening of the polarization that emerged around the October plebiscite on the peace deal. The path toward deadlock is by no means certain. But in a context of sluggish regional growth, a massive regional corruption scandal, declining trust in democratic institutions, and the fracturing of traditional political parties, the possibility of gridlock does raise red flags. Influential social scientists have long warned of the perils of presidentialism, with its tendency toward zero-sum politics and regime breakdown. Over the past twenty years, Latin America has largely managed to avoid these perils through coalition-making and consensus-building. But the region's susceptibility to stalemate suggests these may yet become tense times for the region's democracies.

This afternoon, I had the privilege of speaking alongside Cynthia Arnson, Kellie Meiman Hock, and Michael Shifter on current events in South America. Our talk covered countries from Colombia to Argentina, and subjects from climate change to corruption. You can watch the conversation here.

Brazil is in the midst of a grand debate on its future in the global economy. The debate has been happening behind the scenes, obfuscated by the fireworks of the Lava Jato corruption scandal, overshadowed by the flashier discussions of political reform and the Temer administration’s fiscal reforms, and hidden from view by explosive scandals, such as the recent meat-packing disaster that threatens one of Brazil’s key export markets. But as a recent paper by David Trubek, Fabio Morosini, and Michelle Sanchez-Badin highlights, policy elites in Brazil have been rethinking the country’s place in the global economy. The debate takes place against a dramatic domestic recession and political crisis, but also against a highly uncertain international backdrop, which has fueled questions about development strategy, export markets, and Brazil’s foreign policy preferences. Trubek and his co-authors argue that three schools of thought have emerged, with different feelings about the role of the state in the economy and the priorities for market expansion and global alignment: The most deeply embedded of these schools of thought is the so-called “developmentalist” school, which has endured since the 1930s, and historically has had support from both left and right sides of the political spectrum. Developmentalists support a strong role for the state in the economy, and downplay the need for closer ties with developed economies, for fear of being shoehorned into neoliberal economic policies or constrained by restrictive trade agreements that might limit national options. Developmentalism has been knocked down but not beaten by the combined drama of the Lava Jato investigation that originated at state-owned behemoth Petrobras and the impeachment of President Dilma Rousseff. Developmentalism’s continued influence pushes Brazil away from alignment with the United States and toward South-South relations, including with both Latin America and the BRICS. A second school is the pro-opening group of free traders and open economy advocates that Trubek et al. label the “aberturistas.” They advocate a radical rollback of heterodox economic policies and state intervention, and seek free trade and greater integration into global value chains, from which Brazil is largely absent. They are eager to turn toward the United States and the European Union, and more importantly, to shift the dominant economic paradigm toward greater global integration. But historically, they have been few and far between; their influence in some academic institutions has not been matched by real power, save for a few rare appointments in the Treasury and Central Bank. Somewhere in the middle lies the “nationalist developmentalist” group ascendant in the Temer administration. Trubek and his coauthors describe this group as “chastened” developmentalists, seeking to preserve policy space and promote developmental policies, while “reining in” some of the most interventionist policies adopted by the Lula and Rousseff administrations. Foreign Minister José Serra was an exponent of this perspective, seeking accommodation with the United States and increased access to Northern markets without unduly constraining policy flexibility. His departure from the Temer administration last month is a loss to the nationalist developmentalist cause, but that group continues to have strong support within the government, not least because Temer is a pragmatist who is not hellbent on reforming the status quo beyond the changes immediately required by markets and ratings agencies. The authors are quick to note that Brazil may have concretely fewer options than the largely academic debate between the three schools suggests. The United States has withdrawn from the Trans-Pacific Partnership (TPP) and become far less interested in even discussing a bilateral agreement. Mercosur negotiations with Europe continue at their usual glacial pace. China is a treacherous trading partner, given that its exports compete directly with Brazil’s weakened manufacturing sector. As a consequence, “the idea that trade policy can easily be used to leverage major changes” in the developmental model seems “far-fetched.” More importantly, the authors note that alignment with many of the global trading agreements would require major changes to Brazilian industrial policies, to its state-owned enterprises, and to the regulation of foreign direct investment. None of these—with the partial exception of regulation—seem to be in the works. Nonetheless, the debate over trade may soon be pushed into the political arena. In the wake of the United States’ withdrawal from TPP, trade negotiations in the hemisphere are shifting in a more Latin America-centric, Asia-focused direction. In mid-March, ministers from Latin America and Asia met in Viña del Mar to discuss paths forward. It is telling that while neither China nor Brazil was a party to the original TPP, the Viña del Mar meeting included China, but not Brazil. The train toward Asia-Pacific integration is already picking up steam, with the Pacific Alliance countries – Chile, Colombia, Mexico, and Peru – energetically shoveling coal. As Trubek and his coauthors note, the Temer administration does not have a stable or strong mandate to undertake trade reform, nor does the administration seem inclined to move beyond its “nationalist developmentalist” posture. But this need not mean total immobility: Mercosur partner Argentina is increasingly demonstrating interest in inter-bloc negotiations, bilateral agreements remain a possibility, and the sensation of missing the trade train just as it stops in Latin America enroute to Asia could yet change the calculus of key economic players as Brazil heads into its momentous 2018 presidential campaign.

While politicians have focused primarily on the effects of trade, automation is rapidly transforming the nature of work. A recent McKinsey report estimates that half of the labor done today can be turned over to machines, fundamentally changing the nature of manufacturing, retail, food services, and data processing among other sectors. They predict that China, India, the United States, and Japan will see the largest and fastest shifts as a combination of easy capital, aging populations, and falling productivity speeds the transition away from a human workforce. By their calculations, nearly 400 million Chinese and 235 million Indian workers compete with robots today. In the United States and Japan, some 60 percent of jobs are susceptible to change. Although positions may not disappear altogether, the work people do will change, as roughly a third of today’s repetitive tasks could be taken over by machines. Latin America will also see significant change – with roughly half of the current labor mix in Mexico, Brazil, and Argentina vulnerable to automation, a higher percentage than the United States. Sales of robots already top $2 billion a year, showing that the shift is already underway. Brazil looks the most vulnerable to change, as its mix of stagnant productivity, an aging population, and the infamous “Brazil cost” make labor expensive. In manufacturing, retail, transportation, and agriculture more than half the work done by 32 million employees could be automated. Though Argentina’s economy is slightly less susceptible to automation, its aging population combined with a decade long lack of investment could lead companies to step up capital spending on robotics under the more market friendly Macri government. Slowing the process down are strong unions and unreliable electricity. But over half of its agricultural and manufacturing jobs are vulnerable. Structurally, Mexico has the highest potential to automate, as almost two-thirds of the work done in advanced manufacturing plastic, auto, and aerospace sectors could be phased out, affecting some five million workers. Yet the process in Mexico will likely be slower, cushioned by its younger population and lower wages. The global question is what comes afterward. The majority techno-optimists believe new jobs will emerge for these displaced workers, following the industrial and agricultural revolutions before. They point to car mechanics, coal miners, engineers and more recently app developers as previously unimaginable gigs that have appeared. The pessimists see this time as indeed different, as with the rise of artificial intelligence making machines viable substitutes for people. Leaning optimistic, McKinsey’s advice for advanced nations rings just as true for Latin America. Governments need to expand social safety nets to protect those most vulnerable to these coming labor upheavals. They also need to transform schools and educational curriculums to train a twenty-first century workforce that complements rather competes with robots, encouraging creativity, flexibility, and entrepreneurship. And governments need to support basic research and innovation, helping them shape the ongoing revolution. For Latin America especially, it means promoting these types of investments, as even though they disrupt today’s status quo they will help ensure the region isn’t left behind in these global shifts.

Argentine President Mauricio Macri and his team can take a bow for their first year in office. Despite Macri’s outsider status and his party’s limited influence in the Congress, he in short order took on the country’s biggest economic distortions—unifying the exchange rate, resolving the fight with international creditors, cutting energy subsidies, reestablishing credible statistics, and eliminating a whole host of tariffs, quotas, and export licenses. Now comes the harder part. Macri needs to capitalize on continuing international investor and domestic Argentine support to push through more fundamental changes, restructuring the state and the economy to enable longer-term sustainable growth. In order to accomplish these weighty goals, Macri must not only stay the economic course set during his first year, but also double down and take on Argentina’s outsized reliance on public spending. The rewards from Macri’s exertions are just beginning, as at least some economic indicators are finally turning in Argentina’s favor. Inflation is falling, recession is slowing, and some sectors—agriculture, real estate, and construction in the capital city—are on the rebound. These beginnings of a turnaround will make it easier for Macri to continue taking measures to open up the economy. View full text of article, originally published in Fortune.

[This post was co-authored with John Polga-Hecimovich*. It is the third of a series that begins with this post.] The collapse in Venezuela has many potential costs: democratic regression in Latin America; destabilization of neighboring countries, including, potentially, the fragile peace process in Colombia; the possibility of a significant migrant crisis; rising violence, corruption, and criminality; and threats to hemispheric energy security. A mix of frustration with President Nicolás Maduro’s recent moves and apprehension about the potential outcomes of the crisis has led to a frantic search for alternatives, none of which seems particularly likely to be effective on its own. The paucity of alternatives suggests that the best the international community may be able to hope for is to isolate the regime, demonstrate to moderates within the regime that there are costs to sticking with Maduro, and make efforts to ameliorate the worst humanitarian consequences of the crisis. Taking Advantage of Latin American Leverage In recent years, U.S. policymakers have tried to encourage South American nations to take the lead on regional matters, recognizing that the region may be better positioned to foment meaningful dialogue and consensus than the United States, especially given the checkered past of U.S. interventions in Latin America and lingering local sensitivities about U.S. involvement. But Latin America has been slow to recognize the deterioration of the Chavista regime into an authoritarian state. Chavismo’s determined but patient degradation of checks and balances over the course of seventeen years; the huge revenues available to influence regional friends; the ideological affinities between Hugo Chávez, Nicolás Maduro, and regional leaders; and the government effort to present at least a façade of comity have helped dilute regional opposition to the regime. But this tolerance is slowly changing, not least because of the deepening crisis and shifting ideological winds in South America. At the level of regional bodies, three initiatives are underway. Mercosur has taken an increasingly firm stand against Maduro. During June and July, the new Brazilian administration joined Argentina and Paraguay to overcome Uruguayan resistance and suspend Venezuela from the Mercosur presidency. It also gave Venezuela until early December to meet conditions for accession that it had never met since joining the grouping in 2012. In effect, this signaled Venezuela’s impending expulsion, given that there was never much chance that Venezuela would meet the economic requirements imposed by the bloc. But a lack of consensus meant that Mercosur did not invoke the “democratic clause” that allows the trade grouping to suspend any member who fails to guarantee basic democratic rights. The four original Mercosur members will undertake discussions on the democratic clause on the sidelines of the Ibero-American Summit in Cartagena on October 28 and 29. Such a move to call out Maduro for his authoritarianism would be a significant symbolic rebuke, after years of close ties between the four original Mercosur nations and Chavismo, and it would increase the Venezuelan government’s international isolation. But it would do little to change the internal calculus that keeps Maduro in power, and the sanctions it imposes—suspension from the trade group—will have little practical effect on the Maduro administration in light of Venezuela’s already tenuous claim to membership. A major downside is that such a move might also complicate a more energetic effort to push humanitarian aid, such as medicines and medical relief, which Maduro would be unlikely to accept from the United States, and which Latin America is unlikely to offer if Brazil and Argentina do not lead the push. A second initiative is underway in the Organization of American States (OAS), whose Secretary General Luis Almagro is one of Latin America’s most passionate critics of the Maduro regime’s restrictions of political and civil rights. But Almagro leads a fractured organization, and it will be an uphill climb to the two-thirds support needed to invoke the OAS’ Democratic Charter suspending Venezuela from membership. It is telling that even a joint communique from the organization condemning last week’s events obtained only twelve signatories. Most importantly, of the silent countries, seventeen are members of Petrocaribe, who have benefited from considerable oil subsidies from Chávez and Maduro and remain net debtors to Venezuela. There may be room to split some of these nations from their support for Maduro, but the United States itself had until recently been reluctant to invoke the Democratic Charter, for fear of destabilizing ongoing talks by U.S. officials in Caracas. So it may take a while to gear up new efforts in this regard. Finally, the Union of South American Nations (UNASUR) has been playing a complex role. Of the three organizations, UNASUR under Secretary General Ernesto Samper is the most ideologically aligned with Maduro, and therefore may offer the best prospect for bringing him into dialogue. But this also raises suspicions among the Venezuelan opposition. UNASUR earlier this year created a special commission of former national leaders José Luis Rodríguez Zapatero (Spain), Martín Torrijos (Panama), and Leonel Fernández (Dominican Republic), who visited Caracas several times beginning in May to stimulate dialogue in the run-up to the expected recall vote. But these efforts paid few dividends, and some observers, including Almagro himself, have suggested that the UNASUR mission was a calculated ploy designed to slow the recall. After a hastily arranged visit with Maduro, reportedly requested by Samper, Pope Francis on Monday offered his good offices to “avoid an escalation of violence.” Talks sponsored by the Vatican and UNASUR are to begin on Venezuela’s Isla Margarita on Sunday, October 30. But almost immediately after the announcement, it became clear that not all members of the opposition Democratic Unity Roundtable (MUD) coalition were aware that talks were being discussed, raising concerns that this might be yet another stalling action by Maduro. The repeated use of such talks by the Maduro regime to delay progress or defuse opposition mobilization has left many MUD members skeptical of the value of trying to negotiate with the regime. Washington’s Toolkit There are not many good levers available to the U.S. government as it works to ameliorate the crisis. The best option available to Washington seems to be a combination of dialogue, continued work within regional bodies to pry away votes for the Maduro regime, targeted sanctions, and planning for post-crisis reconstruction. Talks between the Maduro regime and the U.S. government have been underway, most notably during a high-profile visit by Undersecretary of State Thomas Shannon to Caracas in June. Such talks have not shown many public results, but they are important to defuse the worst paranoid rhetoric out of the Maduro regime, to keep open a channel for dialogue, and to demonstrate to the region the willingness of the United States to contribute to a negotiated solution. It may be difficult to find the ten or so additional votes needed to invoke the OAS Democratic Charter, but patient efforts to sway Caribbean nations from their support of the Chavista regime may begin to pay off as the regime’s ability to invest in petrodiplomacy falters. Vice President Biden signaled the wedge that the Obama administration hopes to drive in a January speech to Caribbean leaders, noting that “no country should be able to use natural resources as a tool of coercion against any other country.” Meanwhile, the important repudiation of the regime by previously supportive governments in South America may yet contribute to a broader shift in Caribbean sentiment. The United States has already implemented targeted sanctions against members of the regime: Obama’s Executive Order 13692 in 2015 led to sanctions against seven senior officials. There was broad outrage in Venezuela and throughout Latin America against the order, not least because it labeled Venezuela as a national security threat (U.S. law requires such a determination before sanctions can be imposed). Maduro was able to use the order as a cudgel against the opposition, and he has promoted some of those who have been sanctioned or indicted in the United States. Yet narrowly targeted sanctions, announced publicly so as to send a clear signal, may be more effective today than they were even in the recent past, given the depth of the crisis. Sanctions against individuals—such as permanent visa restrictions and Office of Foreign Assets Control (OFAC) determinations—underline to Maduro’s moderate allies that they must be careful in how far they go in their support of a wobbling strongman. Individually targeted sanctions also send a message to regional governments about the worst players in the Maduro coalition, including embezzlers, cocaine traffickers, and abusers of human rights. So too do efforts to pursue Venezuelans abroad, like Maduro’s nephews in Haiti or the failed effort to nab a former intelligence chief in Aruba. Strategically targeted sanctions may contribute to breaking apart two coalitions: domestic supporters of Maduro’s regime, and the coalition of Latin nations that is stymying international efforts against that regime. Finally, the depth of the crisis suggests that there must be a significant international effort to design humanitarian aid and financial reconstruction. On the humanitarian side, as a recent Human Rights Watch report makes wrenchingly clear, Venezuela is facing one of the most horrific self-inflicted humanitarian disasters ever seen in Latin America. Although Latin American nations (led perhaps, by Brazil’s much-vaunted peacekeepers?) may be better able to orchestrate the delivery of humanitarian aid, the United States is uniquely positioned to provide the scarce medicines and equipment that will be needed to put Venezuela on a steadier footing. With regard to financial reconstruction, as CFR’s Robert Kahn has noted, the depth of the crisis in Venezuela means that returning the country to long-term solvency will be a massive project for international financial institutions. Proactive planning is needed to structure a financial reconstruction plan, as well as to engage with Venezuela’s biggest creditor, China, to ensure the plan’s credibility. The U.S. government must also think hard about what political conditions it will require on the ground before it lent its backing to such a significant financial support package. The good news is that the U.S. government already is engaged on many of these fronts. The bad news, unfortunately, is that none of these policies seem likely to bring quick relief to the Venezuelan people. *John Polga-Hecimovich is an Assistant Professor of Political Science at the U.S. Naval Academy. His research interests include comparative institutions of Latin America, especially the executive and the bureaucracy, as well as presidential instability. He has published peer-reviewed articles in The Journal of Politics, Political Research Quarterly, Electoral Studies, Party Politics, Latin American Politics and Society, and others, and conducted fieldwork in Venezuela, Ecuador, and Brazil. His Twitter handle is @jpolga. Disclaimer: The views expressed in this blog post are solely those of the authors and do not represent the views of or endorsement by the United States Naval Academy, the Department of the Navy, the Department of Defense, or the United States government.

Last month, I had the pleasure of joining Jim Zirin on “Conversations in the Digital Age” to discuss the U.S.-Mexico relationship, the presidential impeachment in Brazil, Colombia’s peace deal, Argentina’s return to global markets, and the turmoil in Venezuela. You can watch the interview here.