The dramatic Latin American crisis

The projections of all international organizations and private analysts indicate that Latin America's economy will only partially recover in 2021. As economic growth during the quinquennium prior to the current crisis was close to zero, the region is immersed in a new lost decade.


Source: United World International Data 

Note: This piece originally appeared in the OECD’s blog, Development Matters. José Antonio Ocampo is Professor of Professional Practice in International and Public Affairs at the School of International and Public Affairs at Columbia University, and former United Nations Under-Secretary-General for Economic and Social Affairs and Minister of Finance of Colombia.

To read the original piece, click here.

The year 2020 closed with the worst economic crisis in Latin American history. The Economic Commission for Latin America and the Caribbean (ECLAC) has estimated that the region’s GDP fell by 7.7 percent. According to the International Monetary Fund (IMF), this is one of the worst crises in the world, similar in magnitude to that of Western Europe and surpassed only by that experienced by India. The projections of all international organizations and private analysts also indicate that the region’s economy will only partially recover in 2021. As economic growth during the quinquennium prior to the current crisis was close to zero, Latin America is immersed in a new lost decade, 2015-2024, which may be worse than that of the 1980s. In addition, the COVID-19 crisis has deepened a long period of slow economic growth: 2.7 percent per year in 1990-2019 versus 5.5 percent in 1950-1980. This is the poorest performance of any developing region in the world in the past three decades.

The social effects have been devastating. According to ECLAC and the International Labor Organization (ILO), 47 million Latin American jobs were lost in the second quarter of 2020, and although 12 million were recovered in the third, they were mainly low-quality jobs. As a result, it has been estimated that an additional 45 million Latin Americans will become poor, representing a decade and a half of retrogression in this field. Poor urban households, where workers predominantly labor in the informal sector, have been hit particularly hard. The positive inequality trends that the region was experiencing in the early twenty-first century, which were interrupted in the mid-2010s, will now be followed by worsening income inequality. This is an especially negative trend for a region that already boasted one of the most unequal income distributions in the world.

The crisis currently ravaging Latin America is, of course, part of a global phenomenon: the worst world recession since the Great Depression of the 1930s, and a synchronized one, at that. It combines the demand problems typical of recessions with supply constraints, because many productive sectors cannot (or can only partially) function due to restrictions imposed by the authorities for public health reasons.

But we must be clear: international factors are not the root cause of the severity of the Latin American economic crisis. In fact, in terms of external shocks, this is one of the least acute crises in the region’s history. This is particularly so in terms of financial shocks. It is true that international official financial support has been limited. This is especially due to the lack of adequate capital from the Inter-American Development Bank and the Development Bank of Latin America (CAF), the two main multilateral banks that support the region. Support from the IMF and the World Bank has been stronger, but remains limited in terms of actual resources that have reached the region.

Private financing, however, has performed very well. After the strong capital outflows from emerging economies at the onset of the crisis, access to hard-currency global bond markets resumed in mid-April 2020. This happened much faster than in previous crises: only two months after the initial shock vs. twelve months during the 2008-2009 crisis, five years after the 1997 Asian crisis, and eight years during the Latin American debt crisis. Private financing has also come with interest rates that, for many countries, are the lowest in history, with long maturities. The debt renegotiations of Argentina and Ecuador, which took place in August, were also relatively successful, enabled by strong support from the IMF.

International trade initially plummeted, but it has also recovered much faster than during the 2008-09 crisis. This is particularly the case for Latin America, as export volumes reached pre-crisis levels in July 2020, according to the data from the CPB Netherlands Bureau. Furthermore, with the exception of energy products (oil and coal), there was no substantial fall in the prices of the commodities that the region exports; the prices of many such commodities are in fact currently increasing.

On the other hand, contrary to the expectation of a sharp decrease in remittances—such as the one that took place in 2009, and required several years to recover—these inflows have increased on average by five percent between January and September in relation to the previous year, according to ECLAC. The situation is, however, heterogeneous: it benefits above all the countries whose citizens have migrated to the United States, and not those who have migrated to Spain or the countries of the Southern Cone.

The severity of the crisis is associated, therefore, with both regional and national factors. First, the region became the global epicenter of the pandemic for several months. Second, as indicated, it hit the region after five years of very poor economic performance—a period that I have previously referred to as a “lost half decade.” Third, the fiscal capacity to face the crisis was limited in almost all countries in the region. As a result, although positive action has been taken—especially to help poor and vulnerable households—such support has been limited compared to that granted by developed countries.

Beyond the recovery measures, which should aim above all at recovering employment levels, it is therefore essential to thoroughly rethink the region’s development model. Latin America must stop being one of the regions with the highest levels of inequality in the world, and the least dynamic in terms of economic growth in the developing world. It is time, therefore, to re-evaluate the effects of market reforms, the results of which have been clearly disappointing.

A new agenda—sometimes referred to as the Latin American Consensus 2020—should be based upon a strong commitment to reducing inequality, stronger counter-cyclical macroeconomic policies, and a major push for production and export diversification based on strong science and technology institutions (including a major digital transformation, as the OECD Development Centre has argued). It must also include strong commitments to robust and de-politicized regional integration, and to the international environmental agenda. Such efforts should be guided by the context of a firm, renewed commitment to democracy.

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