Latin America This Week: June 5, 2023

Lula’s promise to reindustrialize Brazil won’t be easy. Since the last time Lula worked in the Palace of Planalto, manufactured goods have fallen from half to a quarter of Brazil’s exports.

And it doesn’t just reflect a commodity boom: both the values and volumes of manufactured exports declined throughout the 2010s when commodity prices were falling too. Intermediate and capital goods exports went from a high of over $100 billion in 2011 to less than $80 billion in 2020.

The stats aren’t much better on the domestic front. Manufacturing now amounts to less than ten percent of GDP and fewer than eight million jobs nationwide.

Brazil has become an exemplar of premature deindustrialization, a documented pattern of manufacturing decline that has taken hold in many low- and middle-income countries since the 1980s. High interest rates, sluggish growth, weak consumer demand, and a powerful agribusiness sector will make Lula’s aspiration to reverse these trends even harder.

As Milei gains momentum, dollarization gets a second look. Conservative presidential candidate Javier Milei is climbing in the polls ahead of Argentina’s October elections. His call to dollarize the economy appeals to Argentines weary of accelerating inflation, a plethora of official and underground currency exchanges (Blue, Malbec, Coldplay, Qatar, and Netflix) and general economic dysfunction.

While well-known and respected economists Carlos Rodríguez and Roque Fernández have signed on to the Milei campaign as advisors, making the shift would be onerous. The country has all but exhausted its foreign currency reserves and doesn’t have many dependable sources of dollars. Trade makes up just a third of the economy, much lower than in Ecuador or El Salvador when they dollarized. And as this year’s drought—having destroyed nearly half of Argentina’s soy crop—has shown, agricultural exports are volatile.

Argentina has been down this road before, in the 1990s. Convertibility, which pegged the peso to the U.S. dollar at a fixed exchange rate, did kill hyperinflation. But it also led to the 2001 economic crisis and a second, specifically Argentine “lost decade” from which the country has yet to fully recover.