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Emerging Markets

Populist threat mars Latin prospects

Ex-leaders warn of a return of protectionism as downturn hits

Latin America risks a resurgence of populism and protectionism as the global recession takes its toll, former presidents have warned.

Former Peruvian president Alejandro Toledo and former Brazilian president Fernando Henrique Cardoso told Emerging Markets that the reversal of gains in living standards and social discontent could have a profound impact the region’s political complexion.

Toledo said that the economic downturn threatens to erase the progress made over a decade. Zero growth in the region could lead to 8 million people losing their jobs and major social problems.

“Leaders in the region must prepare for the possibility of a noticeable increase in social discontent, that could have long-reaching effects,” Toledo said yesterday.

He spoke of the dangers of populism, protectionism and corruption, that might be hard to shake even once economic conditions start to improve.

“There is a risk that the populist authoritarianism promoted by [Venezuelan president] Hugo Chavez could spread, if governments are not capable of facing the crisis with serious proposals,” he said.

It is not enough to pump money into new programmes, he said. They need to be monitored to guarantee accountability. “Discontent created by unemployment could be exacerbated by corruption, as the poor hear about billions being spent on anti-crisis measures, but don’t see any results.”

Cardoso said in an interview that “new forms of populism, with a strong statist and anti-American bias, are on the rise”.

He also identified protectionism as a danger. “Some countries feel that they have enough competitive export and domestic advantages to call for more free trade”, he said. But “others will try to protect their domestic markets in periods of economic downturn.”

Their comments came as former US president Bill Clinton last night told an audience in Medellin that Latin nations must redouble their efforts to lift their citizens out of poverty – while helping other countries in need.

“When poor people feel powerless turn away from the messy world of democracy and the difficult and demanding world of competition, you ought to get them back, “ he said. “Don’t give up on your neighbours.”

Without referring to Ecuador and Venezuela by name, Clinton said: “They may close their hands to you, don’t you close yours to them. Keep the door open.”

Most countries in the region are focusing anti-crisis programmes on infrastructure, with each adding their own local twist.

While not the largest in term of cash, Peru’s $3.4 billion anti-crisis plan is the largest in terms of GDP, equalling 2.6%.

The most controversial plans so far have come from Ecuador and Venezuela, both hurt by the massive drop in oil income.

Venezuela has decided to up value-added tax to 12% from 9% and reduce spending by 6.75 percent for 2009, but without touching social programmes. Ecuador has increased tariffs on nearly 700 products and added important quotas, one of the restrictive measures regionally.

Ecuador’s finance minister Maria Viteri dismissed criticism of the plan, saying the country’s use of the dollar limits its response ability and that the measures were necessary to keep unemployment from skyrocketing.

Former Peruvian leader Toledo said the protectionism will backfire. “It would be a disaster if countries were to implement trade restrictions. Latin America will get through this crisis faster because we have been opening our markets in recent years.”

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