Trump borrows from Latin America’s political playbook
Despite some notable foreign policy achievements, Donald Trump’s America increasingly follows the worst examples from Latin America, writes William Lee, Director of business intelligence consultancy, SecureValue...
The Latin America-isation of the US continues at a steady pace. Despite some notable foreign policy achievements, Donald Trump’s America is increasingly characterised by cronyism, a blurring of the lines between business and government, lawfare and an overdependence on executive orders and the deployment of states of emergency. All traits that have long been associated with Latin America, writes William Lee, Director of business intelligence consultancy, SecureValue.
To a point, the US has always been like this. Regardless of your political affiliation it is hard to argue that Hunter Biden should ever have held a board position at Ukrainian energy firm Burisma. But the shift feels like its accelerating and what is perhaps more alarming is Trump’s tendency to ratchet up pressure on the US’s supposedly independent institutions, deploying whatever means he can to remove officials from their positions. Nowhere was this clearer than his administration’s efforts to remove Federal Reserve board member Lisa Cook from her post for allegedly lying on a mortgage application.
Respected central banks in Latin America
Although such legal manoeuvring is not uncommon to Latin America yet even some of the region’s most politically volatile countries have taken a hands-off approach to key institutions, such as the central bank. One example is Peru, which, despite being on its sixth president since 2018, has kept Julio Velarde as central bank chairman since 2006.
Peru has seen its fair share of populists from across the political spectrum during that time, as well as mass street protests and congressional machinations to bring governments down. President Dina Boluarte was recently removed by Congress following an impeachment trial, while three former leaders are currently behind bars. But a trusted, steady hand at the central bank has gone some way to retaining investor confidence and underpinning macroeconomic stability. Real GDP growth has averaged 2.1% over the past decade, even without the favourable tailwind of the commodities boom that characterised the first decade of this century.
In Chile, market jitters after the current president, Gabriel Boric, was first elected were moderated by the appointment of Mario Marcel Cullell as Minister of Finance – he had previously served as Governor of the Central Bank of Chile. An orthodox economist, Rosanna Costa was subsequently appointed to the Central Bank.
Similarly, Colombia has had orthodox economist Leonardo Villar heading its central bank since January 2021, despite the more heterodox policy platform of president Gustavo Petro. All of these were quick to act in 2022, recognising the inflation threat and raising rates. Given their long institutional memories of hyperinflation in Latin America in the past, they move faster than most of their developed-market counterparties.
Clearly this is not always the case. Many Latin American countries have seen highly politicised and pliant appointees to key institutions such as the central bank. But the more successful economies that have sustained GDP growth rates over longer time periods have opted for independent, orthodox appointees.
Trump copies Venezuela and Argentina
In this context, Trump’s attempts to tinker with the board of the Fed and pressure it to cut interest rates goes further than many Latin American countries have dared in recent history. Similarly, the removal of the head of the national statistics agency received less media coverage but is equally important, raising the risk of a steady erosion of the country’s macroeconomic credibility. Both Venezuela and Argentina have over the past decade gone through periods of not publishing inflation data, forcing analysts and forecasters to make their own estimates.
US institutions have never been free of political influence. The president of the day gets to choose the chair of the Federal Reserve, and judicial appointments have long been heavily politicised. But recent moves push it up a level. It also opens the door for successor administrations to behave in a similar way, something that has characterised Latin American politics for decades. Lawfare and the use of the courts and legal system to go after opponents once they have left office has been a regular feature of Latin American politics.
Markets have remained strangely calm throughout recent events in the US. One suspects that if Peru were to try to remove the head of its central bank the market correction would be significant as investors mull over the potential impact of government interference in rate setting, its implications for inflation and a sharp rise in external borrowing costs.
Indeed, the only thing that really seems to dent market confidence are tariffs, which Trump signalled as a favoured policy long before taking office. In turn, the sole factor that appears to stay his hand are the sharp market corrections that tariff announcements have induced. Until institutional tinkering has a similar impact, the president is unlikely to change course, putting the US on course for a strange role reversal with many of its southern neighbours, which suddenly look like beacons of institutional prudence next to their erratic northern neighbour.