A second pink tide? The impact of far-left policies

Reliving the past

Latin America has a rocky past concerning its fluid political preferences. For over a century, the continent has been experiencing vast changes in political orientation. However, it is currently undergoing a political transition. A clear trend is visible in which most of the countries in the continent have elected leftist leaders; Latin America’s six largest economies – Brazil, Mexico, Argentina, Chile, Colombia, and Peru – are run by leftist governments. This has been the case before; however, the last four years have shown a surge like never before. The election of Lula da Silva in Brazil is a recent and prime example of a leftist leader replacing a more conservative or centrist predecessor, Bolsonaro.

A shift to left-wing leadership is not a first for Latin America. This phenomenon also presented itself in the early 2000s, when most countries on the continent moved away from neo-liberalism and chose to adopt progressive economic and social principles, combined with a desire to limit American and Western influence on the continent. This period was later called ‘the pink tide’. The rise of the pink tide was mainly driven by the financial crisis in the 1990s, a difficult period for many Latin American countries, with high levels of poverty, inequality, and economic instability. As a result, the situation led to widespread discontent and neoliberal economic policies were seen as exacerbating these problems.

The wave of leftist governments that followed was characterised by a focus on social welfare programs, nationalization of industries, and a general shift towards more socialist economies. This had a mixed impact on the business environment in Latin America. On the one hand, specific sectors could take advantage of the increased government spending on social welfare programs. On the other hand, Western companies found it significantly more challenging to operate in these countries due to the hostile attitude towards foreign investment. Additionally, a more protectionist stance on trade made it increasingly difficult for Western companies to conduct business. Mainly companies in the oil and gas sector faced increased difficulties when operating in Latin America at the time, with some companies facing nationalisation or expropriation of their assets in countries such as Venezuela, Bolivia, and Ecuador.

Nationalization attempts

With the current rise of the popularity of leftist parties in Latin America, the question arises; is history repeating itself? The new leftist leaders were all elected in a time of mounting global economic uncertainty because of the Covid-19 pandemic and the Ukrainian war. Latin America was highly affected by these events and struggled with rising inflation and unemployment rates as a result. This brought the states of Latin America into a similar situation as after the economic crisis of the 1990s. Furthermore, nationalisation programs are already occurring in Mexico and Chile as a result of the transition to leftist-oriented politics. In Mexico, the current left-wing government led by López Obrador aims to boost the state’s role by unilaterally pushing legislation through Congress. For example, Obrador has been trying to bolster Mexico’s state-owned energy companies against private competitors by changing legislation, allowing him to nationalise the industry. Moreover, on April 20^th of this year, Chile’s President Boric said he wishes to try to nationalize the country’s lithium industry at the cost of private owners. If successful, this move would, in time, transfer control of Chile’s vast lithium operations. More importantly, it would devaluate the foreign investment appetence as businesses can get into the scope of government control this easily.

A new pink tide?

These recent developments indicate that Latin America is witnessing a return of the pink tide. However, critics have argued against this reoccurrence. Instead of a leftist wave, they perceive the recent political shift as an anti-establishment movement. Not merely are leftist ideologies gaining popularity; the far-right is also rising. This trend confirms that the leftist movement is based on citizens’ expectations of quick results and their government’s failure to deliver them due to economic realities, causing ineffective governance and voter frustration with status-quo politics. These far-right political figures have and will likely continue to serve as strong opposing voices to the leftist leaders currently in office, undermining their legitimacy and potentially using their parties’ prominence in Congress to stall policymaking. As such, the political environment in countries across Latin America will likely become increasingly polarized, creating a climate ripe for widespread social unrest.

As a result of the combination of rising left-wing as well as right-wing movements, it is unlikely that structural changes will be made that could close the relatively open economies of Latin America wholly and quickly. However, the current rise of leftist parties in Latin America should not be disregarded. One of the most prominent consequences of a potential new pink tide is increased state intervention in the economy. In this scenario, leftist governments are likely to implement policies that seek to increase state control over vital sectors of the economy that are geographically asset bound and directly affect the nation’s consumers, such as oil, gas, and the mining sector, to a lesser degree. This might involve the (re)nationalization of these sectors and the introduction of new regulations and restrictions on foreign investment. As mentioned, Mexico and Chile have become prime examples of how leftist governments can pose serious business continuity risks for foreign companies, particularly in the energy sector. If a pink tide is to continue, international businesses will face increased uncertainty and more significant challenges in navigating new complex regulatory business environments, particularly when involved in the energy or mining sector.

Additionally, a new pink tide could lead to increased anti-Western sentiment. Historically, the pink tide was characterised by the rejection of neoliberal policies and a shift towards policies prioritising domestic interests over foreign ones. Neoliberal policies were often associated with the US and other Western countries, which could give rise to anti-Western sentiment. As a result, foreign companies in Latin America could face a more hostile environment, mainly if they are seen as representing interests that are at odds with local priorities or values. Foreign companies might face increased scrutiny and regulation, especially when they are perceived as contributing to social and economic inequality or exploiting local resources. Furthermore, increased anti-Western sentiment poses risks regarding reputational damage. Negative perceptions might cause negative (social) media coverage in Latin America and overall damage to the company’s brand. In some cases, companies might be targeted by boycotts or other forms of activism.

In short, the risks faced by Western businesses operating in countries with high levels of anti-Western sentiment and calls for nationalisation of energy sources can be significant. It is crucial for companies to carefully evaluate these risks in case of involvement in Latin American countries or before entering new markets. Additionally, it is vital to develop strategies for managing these risks effectively on the continent. To successfully continue or start a business in Latin America, business leaders need to take certain measures, such as:

• Building scenarios of possible future trajectories of Latin American politics, including the most likely and most dangerous scenario, in order to imagine several potential futures and map all potential risks.
• Developing a business continuity plan so the company will be least affected even when the most dangerous scenario occurs.
• Monitoring subtle forms of government intervention, which could lead to anti-Western sentiment or further nationalisation of energy sources in the future.

Proximities can help you gain these key insights and turn them into tangible material. Using our ‘What?’, ‘So What?’, ‘What if?’ and ‘What Now?’ narratives, we help partners and clients not only understand the importance of trends and events but, more specifically, to understand what it means for you and your business from strategic to operational consequences. Curious and interested to see how we could help you? Don’t hesitate to contact us; we will gladly support you.

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