Elections & Energy Policy Brief

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ELECTIONS & ENERGY La Jol la Conference 30 th Anni versary | P O L I C Y B R I E F

ELECTIONS & ENERGY | La Jolla Conference 30 th Anniversary Policy Brief FIRST IN A SERIES OF LA JOLLA CONFERENCE 30 TH ANNIVERSARY POLICY BRIEFS

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LATIN AMERICA POST-PANDEMIC

In early January 2021, the International Institute for Strategic Studies (IISS) predicted a fraught and difficult electoral process for Latin America. IISS expected the ongoing spread of Covid-19, ensuing severe economic recession and the disenchantment by the population with their governments’ response to the pandemic, to challenge incumbents and increase popular uprisings (IISS 2021). The predictions of the IISS have proven to be correct. But clearly, Latin America’s difficulties preceded the pandemic. This Policy Brief is based upon discussions as part of the Institute of the Americas 30 th La Jolla Energy Conference and a Virtual Roundtable held under Chatham House Rules.

The goal is to summarize and add context to those discussions by noting macro trends that impacted the region prior the Covid-19 pandemic, how the pandemic made the situation worse and an overarching analysis of the uncertain future in terms of its political choices and implications for the energy sector, with an emphasis on Ecuador, Peru, Colombia, Mexico and Brazil.

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ELECTIONS & ENERGY | La Jolla Conference 30 th Anniversary Policy Brief THE RISE OF STATE CAPITALISM AND THE CYCLE OF RESOURCE NATIONALISM IN LATIN AMERICA

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In the 1980’s, Latin America sought to create the conditions for private enterprises to prosper by offering legal and fiscal stability, de-risking investments and negotiating free trade agreements; a financial recipe known as the Washington Consensus. Distinct from Latin America, by the early twenty-first century a rising China presented a different path to development. The surge of China’s economy was built on earlier successes of the export- oriented industrial model adopted by previous “Asian tigers” such as Singapore, South Korea, or Taiwan. However, despite their political and economic differences, these countries had in common a less orthodox

approach to economic policy: the state in fact played a key role in their industrialization efforts. The success of fast-growing East and South-East Asian economies encouraged several low and medium-income countries to reshape their development strategies.

The early twenty-first century brought a renewed sense of optimism in Latin America, fueled by rising commodity prices and the arrival of new political leaders who prioritized income redistribution policies as a reaction to rising inequalities experienced in the previous

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decade. The new political leadership moved away from most of the tenets of the Washington Consensus. But neither did they pivot to the Chinese version of state capitalism. Instead, Latin America embraced its extractive dependency by capturing higher rents – directly through their state own enterprises (SOEs), or indirectly by increasing taxes and royalties. Moving average 5 years of GDP for Latin America

Direct transfers and subsidies, in addition to a surge on remittances, resulted in the emergence of a new middle class, mostly low-income families with increasing purchasing power. During the commodity super-cycle Latin America’s poverty declined from 45.4 percent in 2002 to a low 28.6 percent in 2013. Its middle class boomed, with mid-income groups swelling from 27 percent of the population in 2002 to 41 percent in 2017 (Cliffe 2021). The status of this emerging “middle class” was particularly precarious (Kessler and

Benza 2020): most of them were unable to save or invest in long-term productivity improving assets, and the vast majority worked in the informal sector. As a result, while the region experienced a boom in consumption, the same could not be said for investments in infrastructure or improvement in physical or human capital. The region’s health care and education infrastructure remained as deficient as before, and its exports became increasingly dependent on few commodities. This dependency was exposed by the end of the commodity super-cycle in 2015.

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THE PANDEMIC’S HIGH COST AND LIMITED POLICY OPTIONS

The downturn in commodity prices meant that when Covid-19 hit, Latin America was already facing major financial and economic challenges, along with political polarization, and increasing social tensions. Paradoxically, the pandemic offered a short-lived respite from social protests while the population focused on the most primordial priority: survival. In the early days of the pandemic, some leaders, such as Alberto Fernandez of Argentina and Ivan Duque of Colombia, increased their popularity with swift and drastic lockdown measures. Ivan Duque’s nightly TV updates became a hit among Colombians. However, if there was a region that was unprepared to face the challenge of a global pandemic, it was Latin America.

With a large urban population highly dependent on day-to-day informal jobs and without access to health care, lockdowns were extremely difficult to implement. The health care infrastructure was inadequate after years of underfunding . G overnment fiscal space was severely restrained. As the pandemic dragged on, and government transfers proved to be insufficient while the death toll continued to grow, protests quickly resumed in Chile, Bolivia, Ecuador, and at the time of writing, Colombia is experiencing its worst social uprising in recent history.

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ELECTIONS & ENERGY | La Jolla Conference 30 th Anniversary Policy Brief What is evident is post-pandemic Latin America has limited policy options. Countries will have to walk a tightrope of stimulating the economy and managing the massive social difficulties caused, or at least exacerbated by the pandemic, such as high levels of poverty, unemployment, and youth discontent while at the same time trying to balance large fiscal deficits. Policy makers will have to choose between quick fix approaches to increase revenue such as boosting production and exports from extractive sectors or betting on transforming their economies by reducing dependency on fossil fuel consumption and exports while developing the industries, workforce, and supply chains of the future. A NEW THUCYDIDES TRAP AND HOW IT WOULD AFFECT LATIN AMERICA?

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Latin America’s recovery will depend on access to significant international financial support from foreign powers. China has certainly been active in the region: Mexico excluded, since 2018 China has been Latin America’s main trading partner. Additionally, China has been using its pharmaceutical capabilities to engage in vaccine diplomacy by offering up to US $1bn on medical equipment and Covid vaccines, reaching out to many Latin American countries desperate to access these (Ellis 2021). The rise of China has profound implications for the region’s political and energy future. In fact, China’s efforts to secure access to strategic minerals for a post-oil economy is putting Latin America at a considerable disadvantage in terms of economic diversification and industrialization. China is securing access to essential commodities by financing, building, and operating the infrastructure required to

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produce and export them, while favoring Chinese contractors and adding little value to Latin America in terms of job creation and development of capabilities.

The new Biden administration in the United States is reversing many of the policies of its predecessor, re-engaging the U.S. in a series of multilateral agreements that have significant impact in Latin America—such as the return to the World Health Organization and its Covax vaccine program. The U.S. administration has also put strong emphasis on its US$1.7 trillion climate plan. Although the focus is mostly domestic, it expects to create positive externalities for Latin America, for instance by nearshoring supply chains favoring investments in countries such as Mexico or Colombia and through increased foreign development assistance. The emergence of the Chinese state capitalism inspired international relation scholars to speculate about the risk of a new Thucydides trap, an upcoming conflict between the existing superpower, the United States, and the emerging one, China (Allison 2015). This global competition would then naturally influence Latin America’s energy policies. On the one hand, an increasing pent-up demand and economic recovery of China is putting upward pressure on commodity prices, improving Latin America’s economic outlook. Higher commodity prices would consolidate the region’s preference for extractive economic dependency, including the production and export of fossil fuels. On the other hand, attracting investments and financial support to a post-pandemic recovery from the U.S. and the EU would require Latin America to re-think its energy matrix and reduce its dependency on fossil fuels as a source of energy and exports, as both these entities are increasingly favoring a green recovery at home and abroad. THE 2021-2022 ELECTORAL CYCLE The newly elected officials across the region are unlikely to be granted “honey-moons” and instead would have limited mandates and weak governance. Furthermore, the outcomes from the elections already held in 2021 indicate that the region is not following a pattern of clear regional ideological preference or “wave”, as in previous decades. Elections and campaigns in Ecuador, Colombia, and Peru underscore this point.

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ECUADOR

The collapsing popularity of former president Lenin Moreno, due in part to the poor management of the pandemic in Ecuador, in many ways pointed to that country embracing a return to “Correismo,” led this time by candidate Andres Arauz. However, in a crowded field, the first round resulted in a razor-thin finish between the Pachacutik candidate Yaku Perez and the conservative candidate Guillermo Lasso, a former banker who eked out a slot in the run-off. In the second round, there was a realignment of preferences. Indigenous voters stayed home or otherwise supported Lasso, instead of the leftist Arauz. Nonetheless, the “Correista” party UNES managed to secure most posts in the National Assembly, forcing an alliance between the indigenous Pachakutik party and Lasso’s CREO to secure a majority in the National Assembly. Although the elections results were welcomed by the oil industry and the business elites, Lasso’s pro-business instincts seemingly will need to be balanced with the traditional anti-extractive preferences of Pachakutik. Expecting an economic recovery via investments in oil activities in the Amazon would then have to consider an expected increased participation of local communities in the decision- making process, via consultations and approval processes. In that sense, possible local communities’ opposition to these projects, in addition to the international community’s pressure to decarbonize its economy, may force Ecuador to reconsider its oil dependency.

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PERU

Peru, a country that has seen four presidents in three years, has created the standard for elected officials ruling with an extremely low level of popular support—sometimes below 10%. Thus, the expectation for governability may be limited to aspiring for the new president to be able to complete their constitutional mandate. Despite the revolving door at the Pizarro presidential palace, Peru has kept business-friendly policies for a long time, attracting large investments, particularly in the mining and hydrocarbon sectors. Like Ecuador, the first-round election in Peru was characterized by an overcrowded field of 18 candidates. The outcome showed rejection to technocratic market-oriented candidates. In addition, the two second-round candidates represented Peru’s political extremes: Keiko Fujimori—the daughter of former president Alberto Fujimori, congresswoman, and three times presidential candidate—who is aligned with the extreme right and tends to be endorsed by Peru’s urban population and business community. On the other hand, there is Pedro Castillo, who represents the extreme left, a son of poor peasants and himself a farmer, teacher, and union leader. Interestingly, both candidates received modest support in the first round and since then, polls showed stronger support for Castillo and his socially infused discourse of combating excessive poverty and corruption. The June 6 run-off proved to be exceedingly close, and at the time of this writing, Pedro Castillo holds what appears to be an insurmountable lead of about 50,000 votes, though a formal winner has yet to be declared by the Peruvian election authorities. Indeed, since the polls closed, and as votes came in from different jurisdictions, the lead oscillated between Castillo and Fujimori. The continued suspense and lack of clarity is cause for concern, particularly on the heels of major political divisions and chaos in Peru over the last few years. Like in Ecuador, the main challenge for Peru is governance—particularly if Castillo is declared president and implements some of his more radical proposals, like the nationalization of the mining industry and other natural resources, including energy.

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COLOMBIA

Colombia’s election will not take place until 2022, but its outcome may as well be decided now during the protests shaking the country. President Duque is experiencing abysmal approval ratings and that rejection is extending to potential candidates identified as “Uribistas” – those close or endorsed by former President Alvaro Uribe, who tends to represent the extreme right in Colombia. On the other hand, support for the candidate of the left—Gustavo Petro—has increased since protests began. That said, a year is an exceptionally long time in politics. President Duque made what most see as “tone-deaf” political mistakes, such as to propose a major tax reform in the middle of the worst economic recession in recent history and appearing aloof and insensitive to what many human right organizations accused as excessive use of force by the police against protesters. Yet, the degradation of the social order in the country in recent weeks, increasing random acts of violence, and existence of illegal blockades has led in some quarters to protest fatigue among the population.

Preferences can rapidly shift against the protesters and those who try to benefit politically. As the situation drags on, it will be important to consider how blame is placed as, in many ways, the factor of who in the end is held responsible for the massive social and economic chaos and costs of a month of protests, looting and violence, could in large determine the elections of 2022.

Independently of who is elected, the next Colombian president, like those of Ecuador and Peru, will have to balance the expectations of an extremely frustrated society with that of what the country needs to do to regain financial health. In the case of Colombia, the situation is even more precarious because of the damage caused to the country’s infrastructure, the massive closures of large corporations, and the government’s inability to legislate.

The government’s ill-timed tax reform and an equally controversial health care reform were withdrawn. To placate the protests, a series of hastily policies have been proposed. Yet, at the time of writing, there appears to be no agreement in sight between the government and the protesters’ representatives. It is important to note that who is representing the protesters is also under question,

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since there appears to be little coordination between the “first line” – mostly young people from low-income neighborhoods with specific localized demands, and the negotiating team that tends to focus on national-level grievances.

Despite some efforts for conducting negotiations, the reality is different groups are protesting for multiple, and sometimes contradictory, grievances—many embedded on aspirational and intangible goals such as “less poverty” or “more opportunities for the young”. This only makes negotiations more difficult to translate into specific policy targets that are financeable and implementable in a particular period. Sadly, the relatively optimistic outlook for Colombia before the pandemic struck and, in the government’s early response to manage the crisis, has changed into a more challenging and radioactive one.

MEXICO

The two largest economies in Latin America will go to the polls in 2022 for Brazil and 2024 for Mexico. However, Mexico conducted its largest concurrent elections ever on Sunday, June 6, 2021: all 500 seats of the lower Chamber of Congress, plus 15 governorships, 30 local congressional seats, and 1,923 mayors were contested.

Despite what could be perceived as a disastrous management of the Covid-19 pandemic, Mexican President Lopez Obrador remains highly popular. Elected as a disrupter to what many in Mexico felt was a corrupt and elitist political system, Lopez Obrador’s folky style and combative attitude against the big business elite gained him approval amongst the Mexican poor and many others. His direct transfer programs and minimum wage increases implemented early on were welcomed by the electorate. However, having promised economic growth and lower levels of violence during the campaign, he has presided over a country with a declining economy and higher levels of violence than in the past administrations. As such, emerging from the pandemic, the government is likely to focus on growth strategies, yet relying on the president’s nationalistic corporatism, which in Mexico means a stronger role for its SOEs—particularly Pemex and CFE. This strategy, however, runs contrary to Mexico’s objectives of reducing GHG emissions and meeting climate pledges made in the international arena through the Paris Agreements.

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There was little doubt about the outcome of the June 6 elections, as it was widely expected for Lopez Obrador’s party (MORENA) to win; the question was as to the margin and level of control and if the victory would allow Mr. Obrador to secure a supermajority and thus enable him to amend the Constitution.

As it turns out, Mexicans opted for a status-quo: maintaining Lopez Obrador and his party as the main political force in the country, although weakened in the Chamber of Deputies and very far from a supermajority.

What’s next for Mexico? There are two distinct outcomes based exclusively on how soon and how strong there may be an economic recovery.

Assuming a prompt economic recovery, in part supported by a solid U.S. economic growth post-Covid-19, we can speculate a closed- door political negotiation seeking new coalitions in preparation for a post-Lopez Obrador era. His ability to remain as the puppet master would depend on how the economic recovery transfers into political support. As such, a status-quo is likely to prevail.

If, on the other hand, the economy fails to recover quickly, one could speculate Lopez Obrador reconsidering his tactics, perhaps becoming humbler and pragmatic, particularly vis-a-vis the energy sector. In this scenario, it might even become possible for him to return to the market-oriented energy reform as he tries to survive the political backlash and salvage his political legacy.

But, President Lopez Obrador’s rhetoric since the June 6 election and his insistence that he will continue to seek a counter reform in the energy sector regardless of the make-up of the Congress dims hope for pragmatism during his sexenio .

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BRAZIL

In Brazil, after the corruption scandals and economic stagnation that afflicted the long mandate of the leftist Partido dos Trabalhadores (PT) Brazilians opted for a relative unknown. Also elected as a disrupter, Jair Bolsonaro benefitted from the general malaise that took over Brazil, the so-called PT fatigue, by the country’s failure to meet the unrealistic expectations of economic success set in the early 2000’s. Modeled as “the Trump of South America,” Bolsonaro’s management of the pandemic has been a disaster resulting in increasing protests, rapidly declining support and continued spiraling of the nation’s healthcare system and spiking deaths, not to mention Covid variants and impacts on its many neighbors in South America. Despite the calamitous state of the pandemic and his disregard to institutional politics, Bolsonaro remains defiant on his run for reelection. He maintains a loyal base of voters and will hope to make the most of probable economic growth in 2022 to boost his campaign. While support for Bolsonaro dwindles, the political rehabilitation of Luiz Inácio Lula da Silva continues, making him a likely candidate for the 2022 elections with real possibilities of success. The wear and tear of Bolsonaro’s dysfunctional government and Lula’s political expertise and charisma make the former president the leading opposition force to deter Bolsonaro’s political project. Therefore, Brazil is set to repeat the electoral polarization that has characterized Brazilian politics since 1989. However, there is a slim chance for a change in the scenario. Both main candidates carry high rejection rates, which could create space for a centrist third way to grow. Bolsonaro’s far-right agenda alienates half the country, while Lula embodies PT’s tarnished image, which remains deeply unpopular amongst large portions of citizens. The possibility of viable third way campaign breaking the polarization is small, but the dynamism of Brazilian politics is intense.

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ELECTIONS & ENERGY | La Jolla Conference 30 th Anniversary Policy Brief Independently of who is the next resident of the Alvorada Palace, the president residency, Brazil is unlikely to withdraw its commitments to Petrobras pre-salt prolific projects. Brazil pressure vis-à-vis GHG emissions is more likely to focus on the management of the Amazon rainforest rather than its oil production. CONCLUSION Having failed to transform its economic model during the short-lived commodities boom, Latin America entered the Covid-19 pandemic particularly vulnerable. Sadly, but perhaps unsurprisingly, the pandemic has had an extremely high human cost in terms of lives lost, deterioration of health care infrastructure, and surging poverty. A UN study reported in March 2021 that more than 20 million inhabitants in Latin America and the Caribbean were pushed into poverty due to the pandemic. The region’s economy collapsed, and social unrest followed. The stark reality is that political leaders have limited policy options when considering a post-pandemic recovery: faced with the pressing need to boost the economy and address massive social ills, they are required to increase spending. On the other hand, having already reached historic fiscal deficits and debt levels, pressure is mounting to instead balance their public finances by increasing taxes and reducing spending. In many ways, Latin American political leaders have a binary choice. The first is to continue to rely on the extractive industries— benefitting from an expected boom in demand particularly from China—and the exploitation and rents from fossil fuels. The second would be to more fully align with the mantra of a green recovery, the circular economy, and net-zero targets, and rethink and shift the region’s economic model to reduce its dependency on fossil fuels and instead expand the role of renewable sources of energy in its energy matrix. No doubt, the latter approach would be favored by the Biden administration and the European Union, yet both policy options come with their own economic and political risks and challenges and will face resistance from certain sectors of society. The Institute of the Americas would like to recognize Roger Tissot, our Non-Resident Fellow, for his contribution to the discussion and efforts as the principal drafter of this Policy Brief and the participation of expert presenters at the Virtual Panel: Raul Gallegos , Director, Control Risks and Francisco Xavier Salazar , Non-Resident Fellow at the Institute of the Americas. We also appreciate the efforts made by Tania Miranda , our EC2 Program Policy & Stakeholder Engagement Director, the rapporteur for the session.

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WORKS CITED

Alami, Ilas, Adam D. Dixon, and Emma Mawdsley. 2021. "State Capitalism and the New Global D/d development Regime." Antipode. Allison, Graham. 2015. "The Thucydides Trap: Are the US and China Headed for War?" The Atlantic. Cliffe, Jeremy. 2021. "Will Covid-19 mean another lost decade for Latin America?" NewStatesman , May 19. Ellis, R. Evan. 2021. "Viewpoint: Why China's advance in Latin America Matters." National Defense. Entrepreneur. 2021. The pandemic increases inequality and poverty in Latin America. May. Accessed 5 25, 2021. https://www.entrepreneur.com/article/367474. IISS. 2021. "The pandemic and a 2021 super election cycle in Latin America." Strategic Comments , January. International Institute for Strategic Studies. 2021. "The pandemic and a 2021 super election cycle in Latin America." Strategic Comments. Kessler, Gabriel, and Gabriela Benza. 2020. "Nuevas clases medias en America Latina: acercar la lupa." la diaria opinion , March 18. Lavinas, Lena. 2020. "Latin America at the crossroads yet again: what income policies in the post-pandemic era?" Canadian Journal of Development Studies. Marczak, Jason, and Cristina Guevara. 2021. Covid 19 Recovery in Latin America and the Caribbean: A Partnership Strategy for the Biden Administration. Washington, DC: The Atlantic Council. Merike, Blofield, Hoffman Bert, and Llanos Mariana. 2020. "Assessing the Political and Social impact of the Covid-19 Crisis in Latin America." SSOAR. GIGA German Institute of Global and Area Studies. Rocandio, Sebastian. 2021. "Latin America's COVID-19 death toll surpasses 1 million amid worsening outbreak." Reuters , May 20. Torrado, Santiago. 2021. “Iván Duque multiplica sus apariciones y levanta su imagen en medio de la pandemia,” https://elpais.com/internacional/2020-04-22/ivan-duque-multiplica-sus-apariciones-y-levanta-su-imagen-en-medio-de-la- pandemia.html El País, April 22. Vergara, Eva. 2021. “UN finds soaring poverty in virus-hit Latin America región” https://abcnews.go.com/International/wireStory/finds- soaring-poverty-virus-hit-latin-america-region-76256243 ABC News, March 4.

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ABOUT THE INSTITUTE OF THE AMERICAS

Established in 1981, the Institute of the Americas is an independent, inter-American institution devoted to encouraging economic and social reform in the Americas, enhancing private sector collaboration and communication and strengthening political and economic relations between Latin America and the Caribbean, the United States and Canada.

Located on the University of California, San Diego campus in La Jolla, 30 miles from the border with Mexico, the Institute provides a unique hemispheric perspective on the opportunities opened by economic and social reforms in Latin America and the region’s relationship with the United States and Canada.

Since 1992, the Institute’s Energy & Sustainability program has played a crucial thought-leadership role in shaping policy discourse and informing policymakers and investors on the most important trends in the energy sector.

The Institute continues to serve as an honest broker between the public and private sectors across the hemisphere to help forge a constructive dialogue on the issue of clean energy transitions and emerging economic opportunities derived from renewable energy deployment.

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