The Bear’s Lair: Heaven and Hell in Latin America

The election win of Claudia Scheinbaum in Mexico dooms that country to at least six more years of violent Marxist wokery. Yet in a few countries elsewhere in Latin America, the universal gloom of socialism is lifting – Xavier Milei’s government in Argentina and Nayib Bukele’s in El Salvador both offer hope for the future of a kind the region has rarely seen. We must all hope that the light begins to spread and overwhelm the darkness.

Between independence and around 1980, Latin American governments alternated violently. When left to democratic elections, the continent tended to descend into socialism and confiscation, but every now and then, when the economic idiocy got too bad, the military would step in and impose economic order, albeit generally at the cost of an abysmal human rights record. There was some variation in this – Chile’s military government under President Agosto Pinochet was exceptionally effective, indeed better than any previous civilian government, while conversely Peru in 1968 managed to inflict on itself a left-wing military dictatorship, by any standards the worst of all possible worlds.

Around 1990, things changed. Communism fell in the Eastern bloc, so at least temporarily outside funding for Latin American leftists was cut off (thanks to Soros-like entities and the narcotics business, it appears now to have been restored). The death of Communism also reduced the credibility of military coups, which had always been justified by the need to fight the Red Menace. Consequently, for a couple of decades, Latin America settled into a mild social democracy. There were few genuinely Marxist governments (except for Venezuela, a special case which I will discuss). Conversely, there were no genuine capitalist governments either – the continent settled to a European-style alternation of mushy social democrat parties, albeit with more corruption. This in most cases appeared to be good enough to raise the living standards of the populace at a reasonable pace. In some cases, such as Chile and Colombia, the average standard of government was rather better than that implies and living standards genuinely improved. In other cases, notably Argentina, mushy centrism was not sufficient to cope with the pathologies that had been created by more than 50 years of Peronist influence, and so living standards tended to decline.

Venezuela has since 1998 been a special case. The mushy centrist governments from 1970-1998 had the benefit of bountiful oil revenues, but in practice these turned out to be a curse. Corruption was at an unbelievable level, as I can attest from my banking experiences in Venezuela in those years; the government bloated without end since it could always extract more from PetroVen the oil company; the non-oil sector atrophied and living standards for ordinary people went nowhere. In 1998, Venezuela elected a leftist autocrat, Hugo Chavez, who got himself re-elected by ever more dubious means and then died, giving way to his deputy Nicolas Maduro, an out and out Communist dictator.

Had the United States still adopted its robust approach to Latin America of the 1950s and 1960s, Chavez would have been removed early. There was a strong plea for U.S. help after an abortive coup that temporarily removed Chavez in 2002, from the desperate remnants of Venezuela’s business community. However, it was ignored – the idiotic George W. Bush administration would rather undertake a lengthy and futile intervention in Iraq, where Americans would inevitably be hated, rather than a quick excursion into Venezuela, a heavily Catholic country with four times Iraq’s oil where Americans, to whom Venezuelans were strongly attuned, would have been welcomed as liberators. Not intervening in Venezuela while faffing around endlessly in the Middle East was just one of the innumerable U.S. foreign policy blunders since Reagan left, but what a pity!

Mexico is another special case. Like Chile under Pinochet, Mexico was decently run once – but that period of good government was under Porfirio Diaz, who left office in 1911 so no current Mexican remembers it. Then after a bloody series of revolutions, the Institutional Revolution Party (PRI) ruled Mexico as a one-party state from 1929 to 2000. The character of PRI regimes varied considerably. Some like that of Miguel Aleman (1946-52) and Carlos Salinas (1988-94) were quite strongly capitalist and economically successful albeit very corrupt, while others such as those of Miguel Echeverria (1970-76) and Jose Lopez Portillo (1976-82) were equally corrupt but heavily socialist in their orientation. A top Mexican businessman in 1981 described Portillo’s administration to me as following the economics of the Cambridge Marxist Joan Robinson (1903-83). The socialist PRI administrations tended to end in universal bankruptcy, as did the Portillo administration in 1982.

In 2000, the Mexican opposition PAN took power amid universal rejoicing. It was thought that Mexico would move at least modestly in a market direction and that the corruption of the old PRI system would be diminished. That did not happen; instead the two PAN governments were utterly feeble, neither turning the country towards capitalism nor reducing its corruption. Indeed, by the end of the second PAN term in 2012 it became clear that Mexico had a serious organized crime problem with the drug cartels. A further PRI term in 2012-18 did nothing to alleviate this and Mexican living standards have declined, despite a free trade treaty with the United States that should have provided bountiful manufacturing jobs.

With the election of Manuel Lopez Obrador in 2018 and his succession by Scheinbaum, Mexico yet again lurched leftwards. Unfortunately, the corrective mechanisms by which socialism led to bankruptcy have been disabled by the appalling profligacy of the world’s central bankers, printing infinite money and keeping real interest rates below zero for over a decade – so that Keynes’ recommendation of borrowing money to dig holes and fill them up again actually became profitable. Lopez Obrador has gunned the Mexican budget deficit and capital markets have eagerly absorbed new Mexican debt. Pemex is even more of a black hole in its own right, making Mexico the only country that loses money on its oil reserves even when oil prices remain persistently high. The country also has a new $16 billion oil refinery at Dos Bocas that is over two years behind schedule and likely to make losses when it does open. Meanwhile, the criminal cartels run wild, with 37 candidates for office in the recent elections assassinated, and the overall murder rate soars

Scheinbaum is unlikely to be an improvement on Lopez Obrador, although her status as a “climate change” fanatic will make it fun to watch her cope with Mexico’s oil industry disasters. While President Joe Biden remains in power, she will have a friend to the north, unless the money runs out in the U.S. also. Thereafter, Mexico’s history of foreign expropriation will cause sleepless nights in all the dozy U.S. multinationals who have built production facilities in Mexico under the impression that it is less risky than China. “Nearsourcing” is no substitute for investing in U.S. high-tech ultra-productive facilities that use U.S. know-how to employ skilled and productive U.S. labor.

Turning finally to the “Heaven” side of the question, Nayib Bukele’s government in El Salvador is a model to all. By ruthless means, he has decimated the ranks of organized crime, while his dollarized economy makes home mortgages in San Salvador little more expensive than in the United States and inflation equally modest. His is a small country in a rough neighborhood, but one must wish him well and hope that others follow his example.

As for Milei, it is an enormous pity that he has appeared in the Latin American country where idiot leftism is most severely entrenched. Had he manifested himself in Chile or Colombia, which have had tolerable governments within living memory, his chances of pulling off a miracle would be very much higher. In Argentina, with only a small parliamentary representation, he is finding it very difficult to get legislation through a Congress controlled by the corrupt and the leftist (not all are both, but nearly all are one or the other).

Milei’s best step would be to adopt El Salvador’s approach, dollarize and close the central bank. This would cause huge squawking from the vested interests, but he has that anyway; it would force the Argentine economy into a market-oriented mode, such as it has never experienced at least since the late 1970s (briefly) and in a sustained way since the glorious “Infamous Decade” of the 1930s. Argentina has an agribusiness sector that is second to none, eminently capable of filling the gaps left by Russia and Ukraine in world markets; with dollarization its exporters would seize this opportunity, validating Milei’s policies, making it almost impossible to reverse them, and allowing him to use this success to implement drastic reform of Argentina’s bloated and corrupt public sector. Given Congress’s recalcitrance, dollarization is the only way to get the “shock therapy” that Milei craves and his policies need.

For the light of Milei and Bukele to spread, conditions must be right. Milei must succeed, at least partially – I don’t think Bukele’s success is in much doubt. Then other countries must seek to join them in freedom. Venezuela is clearly a lost cause under its present regime, and Brazil may also be a lost cause. The reelection of Lula in 2022 was very close and highly suspect – the relative strength of Lula in Brazil’s more agricultural provinces makes no sense; it’s as if Idaho suddenly converted to socialist wokery and started acting like Portland, Oregon. If Lula adopts a Biden-like policy of imprisoning his opponents, the emergence of a Milei would be almost impossible without military support.

Chile and Colombia offer better prospects. Both are currently being ruled by the left, but the left government has been unsuccessful and is disliked yet is not sufficiently entrenched to destroy the constitution and imprison its opponents (Gabriel Boric in Chile has already tried to wreck the Constitution and failed, twice.) Thus, if either country were lucky enough to spawn a Milei, he might succeed. With additional substantial countries joining Argentina and El Salvador, the road to economic and political salvation would then be open. The return of President Trump in the United States would greatly help this process.

It is something to hope for. Until it occurs, I would be very cautious about investing in the continent, let alone living there.


(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)