Latin America’s lackluster leaders can’t hide behind economic growth any longer

Fallen idols.
Fallen idols.
Image: Reuters/Fabrizio Bensch
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This week witnessed the decline of two Latin American idols who shone famously during the first decade of the 21st century. One of them was Argentine president Cristina Fernández de Kirchner, who took a beating in the midterm legislative elections held on Sunday October 27, losing the majority she needed in Congress to change the constitution and seek re-election in the presidential elections of 2015. This is widely perceived inside and outside Argentina as the beginning of the end of the dynasty that controlled the country’s political scenario for more than a decade. The other fallen idol was dashing Eike Batista, the main shareholder and manager of OGX, the Brazil-based large private firm that filed for protection against its creditors on Wednesday, in one of the largest corporate bankruptcies in Latin America.

These two stalwarts had many features in common. Both had their moment of glory. For Kirchner, it was provided by the high rate of growth that the Argentine economy enjoyed during most of the decade in which she had access to her country’s presidential power, first as its first lady, then as its president.

Meanwhile, Batista became the symbol of the new Latin American entrepreneur that the international markets thought was emerging to turn the region into the world’s engine of growth—a vibrantly tropical yet sophisticated entrepreneur that was expanding his empire with a vitality that seemed to be lacking in the developed countries. OGX is a company that is involved in oil and natural gas exploration and production. His career had been spectacular, indeed. Within a few decades, he increased his personal wealth from practically nothing to $34.5 billion by March 2012, which made him the seventh richest man in the world, according to the Financial Times.

But fatality turned the feet of these idols into clay.  Moreover, the material was sprung from the same fountain: the commodities’ prices boom of the last decade. This boom increased the exports and GDP of commodity-dependent countries in Latin America, including those of Argentina and Brazil, and fooling many people into believing that the high rates of growth of these countries was caused by their government’s wise economic policies—and, in the case of the success of Latin American commodity companies, like Batista’s oil and gas companies, to the superior ability of their managers.

Cristina Kirchner and her now deceased husband extracted huge political dividends from the wrong perception that they, not the internationally determined commodity prices, were the makers of Argentina’s economic success. Her husband was elected once, and she twice, to the presidency. Before the Sunday elections, it was widely assumed that she would seek a third term, for which she needed a two-thirds majority in the two houses of the legislative.  Now the voters have dashed these hopes. The path of Argentina’s international reserves, shown in the next graph, gives an idea of Cristina’s political fortunes.

Image for article titled Latin America’s lackluster leaders can’t hide behind economic growth any longer

Batista extracted huge wealth from the mistaken perception that he was a great entrepreneur and manager—particularly because his rapid sprint into the billionaires’ stratosphere was not based on the actual results of his enterprises but, instead, on the valuation of shares and bonds he had sold to finance his plans to find and exploit enormous gas and oil fields in the midst of the commodities’ boom.

Now the weak foundation of these idols has made its presence malignantly obvious as the commodity boom is coming to an end. Enthusiasm about her putative talents as a great economic tsar led Kirchner to spend excessively, leading her country to high rates of inflation and devaluation that are depressing economic growth while commodity prices have started to fall. Kirchner lost the elections because her popularity is decaying while the economy is diving into a balance of payments crisis.

Similarly, Batista proved to be better at projecting images than at managing his enterprises. He had promised to quickly put four gas and oil fields in exploitation. However, he had to close in early 2013 the first he put in operation. Just before his bankruptcy, he was trying to put a second field in operation. This, which was supposed to contain 285 million barrels of reserves, now is rated at 87.9 million, with a 50% certainty of being produced. The value of these reserves is going down with the price of oil.

Eike Batista, founder and CEO of the EBX Group, the conglomerate holding OGX.
Eike Batista, founder and CEO of the EBX Group, the conglomerate holding OGX.
Image: Reuters/Fred Prouser

Now the Argentines are waking up to reality. Their high rates of growth did not have anything to do with the Kirchner’s policies but with sheer luck that gave them 10 years of extremely high commodity prices. They are also waking up to the fact that, believing that the high rates of growth were the result of the Kirchners’ wild expenditure policies, they wasted the windfall gains that the boom had given them.  With his fall, Batista has caused enormous losses to his fellow shareholders and is leaving $3.6 billion of unpaid bonds floating in the air.

Thus, these two idols had their moments of glory because they fooled themselves and others into unviable dreams—riches coming from price bubbles that one day would have to be punctured.

This is the lesson that Latin America must draw from this boom.  Development will not come from a sudden craze about commodities but only as a result of a sustained effort to improve the human capital of the region.  Regarding commodities, easy come, easy go.