Foreign Policy Blogs

Investing in Credibility: The Story of the Americas

The hyper-expansion of the BRICS nations was seen by some as an overreaction to instability in the global economy in the late 2000s. Countries like Brazil became a hot commodity for investors when Europe and the US economy were faltering. With some normalcy in the US economy returning recently, Brazil’s high growth rates have began to dwindle, placing it in the same 2-3 percent growth rate range shared by many wounded healthy economies worldwide. Actions to deal with recent low growth rates and high expectations of growth and development in Brazil have placed Brazil’s Central Bank in the unfavorable position of having to test their reputation against very high past rates and current low rates when making policy choices. The end result is that an unsuccessful balancing of inflation in Brazil has made many investors lose trust in Brazil’s economic managers. With a loss of credibility, a loss of investment has occurred, all in a phase in Brazil’s infrastructure push where foreign investment is a staple of continued growth and development in Brazil.

Credibility is the banner cry of any Central Bank economist in the Americas, and can make or break a career for many of these policy experts. The OECD recently singled out Mexico as a BRICS type nation that has not been able to increase its productivity, thus placing sustained long-term growth at a distance from Mexico’s economy. The OECD recommended that structural reforms are required to place Mexico in an extended position of growth and to take advantage of recent economic booms in the Mexican economy. Mexico needs to make extensive in-depth policy changes to bring the informal economy into the main economic system in the country. Mexico also needs the help of its legal experts to produce a legal framework that ensures economic growth through the protection of commercial rights, as well as a means to terminate corruption and violence in the country. Despite a great deal of violence plaguing Mexico, it has grown over the last few years at an impressive rate. This singles out corruption as a main source of potential economic loss for the country. Where violence is often attributed to non-state actors fighting over the control of rival drug cartels and old-fashioned street violence, corruption involves private sector and public sector leaders, using company funds or the national purse to provide themselves with direct personal benefits, be it economic or otherwise. Corruption, whether it be the type that is accepted in a legal framework, or one that violates the legal protections in a society, is always a bad investment. This informal tax on investment that comes from corruption in Mexico is a difficult issue to resolve, as it is linked to many historical institutions, interests and groups in the country. Without a comprehensive reform to Mexico’s economy, growth will be limited in Mexico.

A scandal characteristic of some of the worst attributes of corruption in the Americas has occurred recently in one region of one country. This should come as a warning to investors to ensure that their funds are not turned into an informal tax. In order to become re-elected, a political party with a majority used a very expensive policy decision to ensure victory in a few select regions and maintain their majority in government. This was done during a 2011 election campaign. When information was revealed showing that the policy decision was intentionally used as a last minute attempt to gain votes and evidence showed that it was done negligently in order to win an election, the government shut down the legislature. Information about the costs of the policy decision were hidden by the government that won the election and they presented false low estimates to the public with the knowledge of the true costs at many levels at the head of government. When the legislature returned, the information showed that the costs of the policy decision to win the election, the movement of two power plants, did not cost $200 million as claimed by the government, but more towards the $500 million to a billion dollar range. While the extent of knowledge and intention of the head of government was being debated, the office of the head of government erased information and communications that detailed their actions and intentions as late as a few days before the offending premier left office. They officially violated a law that governed the retention of public information documentation, but for some reason there is no penalty to violating the act in question.

While this government still sits at the head of the Government of Ontario, in Canada, investors should note that the loss of over $500 million to benefit the careers of a few public officials is not characteristic of a healthy investment climate. The truth in corruption, whether it is accepted by the standing laws, or violates those laws, is that it always creates economic loss to the public, commercial agents and investors. Without a legal and transparent response and a means to change corrupt governments, investments will be informally taxed without fail.

 

Author

Richard Basas
Richard Basas

Richard Basas, a Canadian Masters Level Law student educated in Spain, England, and Canada (U of London MA 2003 LL.M., 2007), has worked researching for CSIS and as a Reporter for the Latin America Advisor. He went on to study his MA in Latin American Political Economy in London with the University of London and LSE. Subsequently, Rich followed his career into Law focusing mostly on International Commerce and EU-Americas issues. He has worked for many commercial and legal organisations as well as within the Refugee Protection Community in Toronto, Canada, representing detained non-status indivduals residing in Canada. Rich will go on to study his PhD in International Law.

Areas of Focus:
Law; Economics and Commerce; Americas; Europe; Refugees; Immigration

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