Brazil and Argentina – A Tale of Two Countries

Written By Evan Thomsen

Brazil is the de facto leader in South America. It is the largest by land and population, the wealthiest by GDP, and most powerful politically in the region. But as of late, Brazil is declining and facing a resurgent Argentina. The region is facing a role reversal in the future. Brazil’s decline is a golden opportunity for Argentina to seize the role as South America’s economic and political powerhouse.

In Brazil, turmoil is ubiquitous. Politically, President Dilma Rousseff is facing impeachment charges for her use of accounting to hide the size of the government budget deficit. Additionally, charges are being prepared against her for her role in the Petrobras oil bribery scandal, which was a kickback scheme on the state owned oil company that implicates numerous high level officials. With all of these controversies surrounding her, several parties are starting to leave her coalition, increasing the chances of her impeachment. To make matters worse, the BBC reported that the vice president is being investigated for his role in the same deficit cover up as the president and dozens of other governmental officials are being investigated for the Petrobras scandal. Economically, Brazil is declining rapidly. The Economist reports that the GDP is expected to shrink 4% this year and for inflation to creep over 10%. Unemployment is nearing 10% and has doubled since 2014. All of these fiscal and political issues are contributing to Brazil’s rapid descent from the throne of South America. [1]

Argentina stands poised to overtake Brazil’s place as the leading South American state. The new Argentine president, Mauricio Marci, is pulling the country out of fiscal darkness and back into the world scene. For over a decade, Argentina has been unable to obtain money from international markets due to unpaid debts from a previous government default. The former president refused to even negotiate with the country’s creditors, but Marci made restructuring the major issue of the campaign. He pushed for Argentina to pay off its debts and reenter the global market. A new debt deal that passed the Argentine Congress has done just that. Susana Malcorra, Argentina’s foreign minister, highlighted the top goals of the government which further exemplify Argentina’s future ascension: elimination of poverty, regularizing financial relations with the US, fighting narcotrafficking, and rebuilding democratic institutions. Because of these goals and the newly enacted debt deal, Argentina is rising and will soon surpass Brazil for effective control of South America; they will be able to exert their influence over other South American states both economically and politically, whereas Brazil will struggle to continue to do so.

While Argentina will continue to rise, Brazil slips into continually increasing turmoil. Brazil appears to have no out from their political unrest. Any viable replacements to President Rousseff are under investigation for the Petrobras scandal, and rampant corruption signals future political instability. To parry this, Argentina is strengthening democratic institutions and eliminating a potential source of bribery and corruption, narcotrafficking. Argentina will soon be able to bring in investment at a significantly cheaper rate than they currently are; the BBC notes that external borrowing costs in Argentina are almost double elsewhere in South America. With this new stream of investment and the flight of capital from Brazil, the Argentine economy is poised to grow rapidly. Meanwhile, Brazil’s long-term prospects are grim to say the least. Not only is the GDP expected to decrease just for this year, it is projected to decrease over the next few years. This lends itself to higher rates of unemployment and with a ballooning deficit and debt burden, Brazil will be forced to cut its numerous social welfare programs. Without the cuts, the government could face a default and tumble further out of control. [2]

[1] “Brazil’s Fall,” The Economist, January 2,2016. <The Economist>

[2] “Argentina Settles 15 Year Bond Battle,” BBC News, February 29, 2016. <BBC>

 

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