Understanding Latin America’s New Political Paradigm

MONTEVIDEO – Center-left and populist governments’ hegemony in Latin America for most of the last decade now seems to be coming to an end, with center-right parties rising to power in Argentina, Brazil, Guatemala, Paraguay, and Peru.

We should not be surprised that Latin America’s “red tide” is receding. Historical evidence from the last 40 years shows that political cycles within the region are highly synchronized, and tend to reflect economic booms and busts.

From 1974 to 1981, Latin America’s economy grew at an average annual rate of 4.1%, compared to its annual 2.8% historical average, owing to the 1970s oil-price spike. Petrodollars flooding into the region financed huge public-spending increases and real-estate booms, and fueled an economic bonanza that propped up the continent’s military dictatorships. At the time, authoritarian regimes took credit for the economic boom, because they had reestablished stability and order on the continent.

But this period turned out to be the proverbial calm before the storm. The party was cut short in the early 1980s, when then-Federal Reserve Chairman Paul Volcker took away the punch bowl, by engineering a sudden interest-rate hike to stem inflation. The “Volcker shock” created a triple whammy: the US entered a deep recession; commodity prices plummeted; and Latin America’s capital inflows abruptly reversed, shifting toward US dollar-denominated instruments that offered better yields.