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The outcome of the U.S. Midterm elections, to be held on November 2, is uncertain but if, as recent polls indicate, the Republican Party wins control of the House of Representatives while the Democratic Party retains control of the Senate, Congress could be paralyzed.

This is unlikely to have a major impact on U.S. foreign policy towards Latin America, except possibly in the cases of Cuba and Venezuela, but the impact of political paralysis on private investment in the United States could have negative consequences for Chile’s economy.

This was the conclusion of a roundtable held at the U.S. Embassy in Santiago on October 27, which was organized by AmCham and the U.S. Embassy to discuss the significance and possible consequences of the midterm elections.

“What’s at stake is the confidence of the private sector, and that has important repercussions for the U.S. economy and therefore the world,” said Kathleen Barclay, director of the consulting firm Asesorias KCB Ltda and chair of bUSiness CHILE’s Editorial Committee.

Some US$2 trillion in private investments in areas like energy, infrastructure and healthcare are on hold as companies wait for clarity regarding future policies, but a deadlocked Congress could delay these investments even longer, said Barclay.

Unlike Chile’s political system in which representatives in the Cámara de Diputados (Lower House) and Senate are elected every four years at the same time as the President, U.S. voters have a chance to change their elected representatives every two years.

All 435 of the seats in the U.S. House of Representatives and 37 of the 100 seats in the Senate are up for election on Tuesday, as is the Office of Governor in the 50 States.

The Democratic Party currently controls both houses comfortably: the current make-up of the House of Representatives is 256 Democrats, 178 Republicans and one vacancy, while the Senate has 58 Democrats, 40 Republicans and two Independents.

But, if polls are accurate, the Republican Party will win a historic victory in the House on Tuesday. The Democrats are expected to lose around 55 seats compared to just five seats for the Republicans - the last time the Democrats lost by such a wide margin was in 1974 when they lost 36 seats.

“This could be the biggest change in the House of Representatives in modern times,” said George F. Jones, a retired U.S. Ambassador and president of the Elections Committee of the American Foreign Service Association (AFSA).

In the Senate, however, it’s a different story. Polls predict that the Democratic Party will retain control, albeit by a slim margin: 52 to 48 seats.

The last time a party lost the House but held the Senate was in 1930, and a hung Congress does not bode well for the country.

So why are voters expected to punish the Democratic Party so harshly?

According to Mark Hugo López, Associate Director of the Pew Hispanic Center in Washington DC, support for the Republic Party has climbed steadily since January and 53% of likely voters disapprove of the way President Obama has done his job.

“Many likely voters are furious with Obama and the government,” said López.

This represents a major shift in public opinion. President Obama took office in January 2009 as the most popular president in U.S. history, but since then his approval rating has plunged.

Clearly, jobs and the economy are the main concerns. Around 14 million Americans are unemployed, the fiscal deficit is rising and the recovery from the economic crisis has been slower than expected.

Voters, particularly supporters of the conservative Tea Party movement, are enraged with President Obama’s preoccupation with healthcare and financial reform, while the economy wobbles.

But according to Karen Poniachik, Visiting Fellow of the Center for Hemispheric Policy at the University of Miami, the expected Democratic defeat can be attributed to a “general rejection of the political establishment in Washington” more than anger at any one party.

This “anti-Washington” sentiment stems from disillusionment with the economy and unemployment, with the Democratic Party expected to pay a high cost for the lack of progress in these areas.

President Obama is not to be written off just yet – he will likely run for re-election in 2012 – but to make progress in a divided Congress he will have to make concessions to the Republican Party in areas like tax breaks and free trade, said Poniachik.

For example, free trade agreements with South Korea, Colombia and Panama that are important for increasing U.S. exports are still pending in Congress.
“We need a politics of consensus to move the country forward,” she said.

But whether Obama can forge a good relationship with Republican leader John Boehner as former President Bill Clinton did with former House leader Newt Gingrich when the Republicans won control of Congress in 1994 remains to be seen.

What does all this mean for Chile?

From the economic point of view, increased private investment in the United States could generate more export opportunities, but this requires clear fiscal policies.

“If the U.S. economy does well, we will do better also, but greater investor confidence is needed,” said Hernán Felipe Errázuriz, president of the Chilean Council for International Relations.

In terms of U.S. foreign policy, the election is not expected to have a major impact, but it could alter the political climate regarding relations with Latin America, said Errázuriz.

More power in the hands of a conservative Republican majority, for example, could lead to a harder line on Cuba and Venezuela, while isolationism could have negative economic consequences for Chile and Brazil, said Errázuriz.

In the final analysis, the U.S. economy will recover regardless of the election result, but there is the risk that political paralysis could tie the government’s hands and cause even more voters to become disillusioned with Washington.

Much depends on how President Obama and the Republican leadership react in this new scenario. The opportunity for consensus exists, but both sides must be willing to make concessions.

“We need strong leadership from the White House,” concluded Barclay.