Nevertheless, it is entirely possible that, in a few years’ time, Brazil will again have a left-wing president—perhaps Lula, whose convictions were overturned in March—while Mexico is back in the hands of a centrist. The two countries’ future policy course is thus hard to predict.
Why aren’t debt markets spooked by all this uncertainty? In part, it is because both countries have remained fairly conservative in their debt management. True, Brazil’s government debt is projected to reach nearly 100% of GDP this year. But it is mostly denominated in local currency, and domestic residents hold as much as 90% of the total, up from 80% five years ago. Even corporate foreign borrowing has been contained, with the country’s external debt still only around 40% of GDP.
Mexico’s public debt is lower than Brazil’s, at 60% of GDP. For all his radicalism, AMLO has so far been a fiscal conservative, much as Lula was in Brazil. The lesson that debt crises can derail a populist revolution has been well learned.
True, governments across the region have mounted a surprisingly robust macroeconomic response to the pandemic. But they have far less scope than the US to continue using deficit finance. To raise spending and tackle inequality on a sustainable basis, Latin American countries must also find a way to increase budget revenues. Ironically, the protests in Colombia began not in response to benefit cuts, but because the government tried to raise taxes on the middle class to provide more and better pandemic relief to the country’s poorest citizens. Governments seeking to redistribute income need to raise taxes on better-off citizens rather than temporarily paper over problems with additional debt.
In recent decades, the US has been reluctant to become deeply engaged in resolving Latin America’s problems, but perhaps this will change. For starters, the region needs massive vaccine assistance in order to get back on its feet. America can also help by strengthening trade—especially by addressing pandemic-induced bottlenecks and removing lingering Trump-era protectionist measures.
Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.
Kenneth Rogoff, professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of "This Time is Different: Eight Centuries of Financial Folly," his new book, "The Curse of Cash," was released in August 2016.