Tag Archives: Inflation

Latin American Presidential Elections and Political Business Cycles

Brazil’s president, Dilma Rousseff, has just announced that social welfare payments for the poorest in Brazilian society will increase by ten per cent. These payments will be made through the hugely popular bolsa família conditional cash transfer programme, which covers nearly one-fifth of the total income distribution. This increase also surpasses the current, six per cent rate of inflation.

But why has Dilma decided to pursue this policy now? This move comes just before the presidential election in October, which have seen the popularity of Dilma slide from 43.7 per cent in February to 37 per cent in April, and increased support for her main rival, Aécio Neves, of the Partido da Social Democracia Brasileira (PSDB). Clearly, Dilma Rousseff’s decision to increase bolsa família is not unrelated to her waning public support and the looming election in October. What is more, there is now solid empirical support for the electoral benefit to be accrued for PT incumbents from bolsa família, and conditional cash transfers in general.[1]

What is interesting is that Dilma has decided to increase social transfers as prices are rising, and in a country with a history of hyperinflation. This provides us with the perfect opportunity to reflect on the relationship between inflation, a topic I frequently raise on this blog, political business cycles and Latin American presidential elections.

In a recent book on this very topic, Stephen Kaplan,[2] building on political business cycle theory, argued that in Latin American countries with a history of hyperinflation, politicians, and those on the left in particular, are unlikely to pursue traditional business cycles.[3] The damaging distributive consequences of inflation for middle income and poorer voters, together with the business community, means the electoral cost of price instability forces politicians from inflation-scarred countries to be far more risk-averse than their counterparts in other, less economically volatile countries. Given the credibility problem of the left in Latin American with regard to macroeconomic policy, this effect becomes exaggerated under left politicians. This helps explain Lula’s fiscal reticence (and also that of Néstor Kirchner).

Is Dilma now pursuing a political business cycle? This would be unexpected, given the context of rising prices and the historical record of inflation in Brazil. Well, the short answer is no. At the same time as Dilma has increased social spending, she has also announced spending cuts in other areas, in order to combat the budget deficit and reduce inflation. Dilma’s electoral strategy is therefore targeted social transfers to a specific group, as opposed to a general political business cycle. Similar electoral strategies have been employed elsewhere in Latin America by the likes of Alberto Fujimori (also a country with a history of inflation).

To understand electoral business cycles in Latin America it is worth noting the historical context. In countries with a history of inflation, and where prices are rising, incumbents are more likely to engage in targeted spending. In contrast, in countries with no history of inflation, then we might expect incumbent Latin American presidents to swell the public economy. Compare Dilma’s strategy to the expansive policies of Ricardo Martinelli, whose party competes for the presidency in Panama on Sunday. Of course, to see if this policy has been successful, please check back here next week.

[1]See for example, Zucco, Cesar and Timothy Power. 2013. “Bolsa Família and the Shift in Lula’s Electoral Base, 2002-2006.” Latin American Research Review, 48(2), pp3-24.

[2]Kaplan, Stephen B. 2013. Globalization and Austerity Politics in Latin America. Cambridge University Press.

[3]That is, inflating the public economy just before an election to garner electoral support.

Venezuela – Nicolás Maduro Begins the New Year with a Cabinet Reshuffle

For many, the New Year represents an opportunity for change. For Nicolás Maduro, the somewhat embattled President of Venezuela, the beginning of 2014 has ushered in a cabinet reshuffle and a reorganization of the nation’s economic management.

On Wednesday January 15th, Maduro, in his first state of the union speech, addressed the national assembly and presented his annual government report. As part of this speech, Maduro laid out his major initiatives for the year. All in all, these initiatives signaled quite a degree of organizational change in both his government and strategy of economic governance.

To begin, he announced the reorganization of his cabinet. José Khan will become the Minister of Commerce, while the Public Banking Ministry and the Ministry of Finance will be merged. Rodolfo Marco Torres, the current Minister of Public Banking, will assume this new expanded portfolio and replace Nelson Merentes as Finance minister. Although Merentes will now be the head of the Central Bank, many see the appointment of Torres, an army general who was part of Hugo Chávez’s attempted coup of 1992, as a clear indication that Maduro is set upon deepening the socialist revolution begun by his predecessor, given Torres is deemed something of an ideologue in comparison to the more pragmatic Merentes.

As part of the realignment of his economic team, Maduro also announced a series of economic reforms aimed at addressing some of the more serious underlying flaws in the Venezuelan economy. These reforms include a strengthening of government control over the national currency, the bolívar. The Foreign Exchange Administration Commission (Cadivi) is to be disbanded and its responsibilities assumed by the National Foreign Trade Corporation (which will now be run by Alejandro Fleming), while the official exchange rate has been set at 6.3 bolívars to 1 US dollar, for the entirety of 2014. Although this was not the currency devaluation expected by economists, given the widening fiscal deficit, the Financial Times has suggested it represents “devaluation by stealth,” as the foreign exchange auction system (Sicad), where the Central Bank sells US dollars, is to be significantly expanded.

Finally, both to further bolster the government’s reforms, and to combat an inflation rate hovering around 54 per cent, Maduro announced the establishment of a 30 per cent ceiling on profits for all businesses, which will be part of the new Law on Costs and Fair Prices.

However, it isn’t all change in Maduro’s Venezuela. Rafael Ramírez will remain as vice-president of the government’s economic cabinet, energy minister and president of the state-run oil company, PDVSA.

Venezuela – Mixed Result for Maduro and PSUV in Municipal Elections

On Sunday December 8th, Venezuela held local elections for 335 municipalities and two metropolitan districts. These elections were widely touted, at least by the major opposition alliance, the Mesa de la Unidad Democrática (MUD), as a plebiscite on the rule of Nicolás Maduro and public support for the ‘Bolivarian Revolution.’ The results were not as damning for Maduro and his Partido Socialista Unido de Venezuela (PSUV) as the opposition might have hoped.  The PSUV and their allies won over 49 per cent of the total vote, with the MUD  (and allies) claiming 43 per cent, and independents accounting for the remaining votes. This means that, according to the latest count from the Consejo Nacional Electoral (CNE), the PSUV now hold power in 196 municipalities, in comparison to 53 municipalities controlled by MUD.[1]

However, this is not to suggest that all is rosy for President Maduro. Although support in the rural strongholds of the PSUV held steadfast, the urban support base of the party has clearly been diluted. The MUD now controls seven of 23 state capitals, including: Maracaibo (Zulia state), Valencia (Carabobo state), Iribarren (Lara state), San Cristóbal (Táchira state), Barinas, the hometown of Hugo Chávez, (Barinas state), and the capital Caracas, where the incumbent mayor, Antonio Ledezma, just held on.

Without a doubt, the erosion of this urban support for the PSUV partly lies in Maduro’s economic woes. Despite his recently passed ‘Enabling Law,’ Maduro has failed to tame inflation, now at 54 per cent. With price controls across the economy doing little to address the problem, diminishing support for the PSUV in the big cities is clearly related to the traditional aversion of the urban middle and (formal sector) working classes in Latin America to price instability.[2]

This election also clearly highlights the continuing polarization of the Venezuelan electorate and political classes. The opposition have raised questions about the extent of electoral malpractice during these elections. Vicente Díaz, a member of the board of CNE, denounced the government abuse of state media to undermine the opposition. The government deny this.

Finally, if the considerable levels of political polarization in Venezuela have any positives, it is probably the increased political participation it drives. Turnout on Sunday was over 59 per cent, a rather impressive figure for municipal elections anywhere.


[1] Up from 46 municipalities in 2008.

[2] See Andy Baker (2010) The Market and the Masses in Latin America: Policy Reform and Consumption in Liberalizing Economies, Cambridge University Press, for an excellent discussion on the importance of inflation for the Latin American electorate.   

Venezuela – Nicolás Maduro Seeks Decree Power from the National Assembly

Last Tuesday October 8th, President Nicolás Maduro asked the National Assembly to pass the “Enabling Law,” a piece of legislation, which would grant him decree power for 12 months in order to deal with corruption and ‘economic sabotage.’ This would give President Maduro the ability to fast track certain pieces of legislation and to pass others without congressional approval.

In a three-hour speech to the National Assembly, Maduro stressed his intention was to use this power to fight corruption within Venezuela, and even within his own party.

The opposition accused Maduro of attempting to increase his own power, and sideline a strengthening opposition. Decree power would most likely be very welcome for Maduro, both in order to sideline potential internal dissent from within his own bloc and to deal with spiraling inflation. In September, inflation peaked at 49.4 per cent, a jump of nearly 25 per cent since Hugo Chávez, Maduro’s predecessor, died in March. Maduro has struggled to deal with the increasing instability of prices, and this has affected his popularity. Although Maduro has suggested this enabling legislation will allow him to tackle ‘economic sabotage’, there is a lack of concrete specifics regarding what exact policies would be covered by this power.

Of course, this is not the first time that a Venezuelan President, nor indeed a Latin American president, has requested such ‘delegated powers’ from the legislature. Hugo Chávez was granted the power to rule by decree a total of four times, and used this power to enact nearly 200 legal changes, which allowed him to increase the presence of the state in the national economy. In Argentina in 1989, Carlos Menem was also delegated authority by the legislature to rule by decree in order to address the crippling hyperinflation that was plaguing the economy. Likewise, also in Argentina, Néstor Kirchner was delegated similar authority. This lack of legislative oversight, or horizontal accountability, became so widespread that the famous Argentine political scientist, Guillermo O’Donnell (1936-2011), characterized these weakly institutionalized Latin American democracies as ‘delegative democracies.’[1]

It remains to be seen whether the assembly will pass the enabling law. Maduro needs 60 per cent of the assembly votes, or 99 seats. Together with his own bloc, the Partido Socialista Unido de Venezuela (PSUV), the Patria Para Todos (PPT) and Chavista-minded independents, Maduro should be able to guarantee 98 seats. He just needs to find one more legislator.

Discussions in the house will begin next week.


[1] O’Donnell, Guillermo. 1994. “Delegative Democracy,” Journal of Democracy, 5(1), pp. 55-69. Although in recent years, the analytical utility of this concept has been called into question.