The crisis caused by covid reached Latin America and the Caribbean (LAC) in a period of low growth and growing economic and social imbalances that fueled protests throughout the region, such as those in Colombia, Ecuador or Chile. Social discontent, which translated into strong political polarization, and, according to Latinobarómetro data, also a historical discontent with democratic values, have once again exposed structural weaknesses that prevent the region from overcoming the development gaps that divide territories and social strata. Social inequality continues to be a dominant pattern in the region that continues to have the most unequal income distribution on the planet. This continued to be the case even during the boom in commodity prices that benefited the region for more than a decade until the financial crisis of 2008. The last phase of growth in LAC resulted in a re-primarization of many economies focused on agribusiness and mining and hydrocarbon extractivism, which increased vulnerability to phenomena such as the pandemic. Vulnerability to external shocks is a curse that stems from a model of international insertion that is too dependent on the prices of raw materials and foreign financing. But endogenous factors related to a very fragmented and unequal social structure and weak institutions whose most disruptive element is corruption intervene in the consequences of this weakness.
At the beginning of the millennium, Latin America was trying to heal the social scars left by structural adjustment policies in the 1990s to deal with the foreign debt crisis. The drastic contraction of social spending and privatizations fueled pockets of poverty and for this reason it was baptized as the lost decade. At the beginning of this century, the confluence of several factors opened a window of opportunity. In the first place, there was a favorable economic cycle with high prices for raw materials that increased available public resources. In parallel, and partly as a response to the effects of previous neoliberal policies, leftist governments more committed to public policies came to power. Finally, the international development agenda was concentrated around the Millennium Development Goals (MDGs), emphasizing the eradication of poverty and indigence, which favored the multiplication in many Latin American countries of new political initiatives aimed at eradicating the high poverty rates. During this period, some countries managed to reduce poverty rates substantially, particularly in Brazil, although the reduction in inequality was less.
However, the global financial crisis once again showed the vulnerability of the Latin American economies to changes in the economic cycle, which has led to an accelerated reduction in the gains that had been made in more than a decade. As of 2015, the process of poverty reduction has already begun to reverse, although still weakly. Obviously the effects of the pandemic have accelerated this trend. According to the Economic Commission for Latin America and the Caribbean (ECLAC), in 2014 the percentage of extreme poverty reached 7.8% of the population, the lowest since it began to be measured. In 2021 it is estimated that the percentage rises to more than 12.5%. If moderate poverty is included, more than 33.5% of the population is below the poverty line. This represents a total of more than 209 million poor people in the region. Between 2019 and 2020 the number of poor people grew by 22 million. The possible consequences of the crisis caused by Russia’s invasion of Ukraine generate even more uncertainty due to the danger of economic stagnation combined with inflation, something that directly affects the most vulnerable sectors. It is already beginning to fear for a new lost decade.
According to data from the Inter-American Development Bank (IDB), inequality in Latin America, which had steadily decreased between 2000 and 2019, increased by an average of 2% between 2019 and 2020. For its part, the Fifth Report on the progress and regional challenges of the 2030 Agenda for sustainable development in LAC (ECLAC, 2022), with data prior to the pandemic, shows an evolution of the performance indicators of the 2030 agenda with positive effects for only 40% of the indicators analyzed, with 31% advancing but more slowly than necessary to reach the goals, and 29% moving away from the goals.
In these circumstances, Latin American society has faced the crisis without the basic resources to defend itself. Most countries do not have an effective universal social protection system. And, although progress has been made in the generation of basic income policies, this does not reach all the needy sectors, and the resources allocated are scarce, so that income barely serves to cover existential needs. Taxation systems have a low impact on income redistribution due to the low progressivity of taxes and the scarcity of social spending, which continues to be well below that of the most developed countries. This data is decisive to understand why Latin America and the Caribbean, with 8.4% of the world population, has registered the highest number of deaths from covid in the world, which represents 28.8% of the total deaths reported in the world. planet.
Another factor that has influenced the worsening of the effects of the crisis is the low quality of employment in the lowest strata of the population. According to the International Labor Organization (ILO), before the pandemic, 53% of workers in the region were in the informal economy. That means that they are unstable jobs and are easily lost in difficult situations. In addition, these workers lack contributory social protection networks. Although a quick recovery is expected for some activities paralyzed during the pandemic, the recovery of the labor market is still slow and a slight increase in informality is observed in most countries. This contributes to increasing inequality and low productivity due to a misallocation of resources and lack of investment in technology and innovation. The average unemployment rate in the region was 10.7% at the end of 2020, which represents an increase of 2.6 percentage points compared to 2019 (8.1%). In addition, it has been unequally distributed, affecting more women, informal workers, youth and migrants.
The low quality of employment is also related to inequality in access to training. The possibility that the lowest strata have access to higher education is still very low in LAC. Although universal access to primary and secondary education is largely guaranteed, its quality is not, and this closes the doors to higher education. Although 7 out of 10 adolescents start secondary school, which is already compulsory in almost all countries, only 5 out of 10 finish it. Circumstances are very diverse depending on the country, but the levels of school dropout are concentrated in rural areas, low-income people, and Afro-descendants and indigenous people. The covid has also highlighted the inequalities in access to technologies for the different layers of the population. While some were able to replace face-to-face classes with online resources, others were left behind and saw their learning process interrupted, without being able to assess today what consequences it may have on the affected generations.
In the financial crisis of 2008, contrary to what happened in the 1990s, the countries of Latin America were coming off a period of intense growth and the governments had financial reserves to apply countercyclical policies that cushioned the impact of the global crisis initially. But once the first phase was over, the excess spending could not be maintained. As of 2015, when the demand and price of raw materials fell, there was a loss of tax revenue from exports that were not compensated by the necessary deeper tax reforms, which is why the fiscal deficit increased. After the brutal drop in Gross Domestic Product (GDP) as a result of the pandemic, there was a first growth rebound in the first half of 2021 of approximately 6% on average. But the recovery has been uneven. Some countries have returned to pre-pandemic GDP, but others have seen slower growth due to being more exposed to pandemic-sensitive sectors, such as tourism in the case of Caribbean countries.
Currently, LAC is the most indebted region in the developing world with the highest weight of foreign debt in GDP (77.6%). In addition, it has the highest percentage of external debt service in terms of exports of goods and services (59%). The financing lines granted by the IMF have not been enough, and the states have had to resort to borrowing in the market with sovereign bond issues, borrowing more.
The need to inject liquidity into the economy to overcome the ravages of the pandemic has led to an escalation in inflation, increased with the rise in energy prices and the effects of the war in Ukraine, which is driving the rise in prices of the food. The high inflation will translate into an increase in the rates of sovereign bonds, which may put the solvency of several countries in the region at risk. International cooperation will be needed to avoid a new episode of sovereign debt crisis leading to austerity measures and more years of slow economic growth.
Public funds are not sufficient for the financing needs of the region, it is necessary to attract private investment. A transformative recovery would require much higher investment rates than in the period immediately before the pandemic. However, according to ECLAC, foreign direct investment (FDI) in LAC in 2020 was the lowest in the decade, which determined that the share of FDI in GDP was only 2.5%, when in the average for the 2010s reached 3.5%. Attracting investments that generate employment and sustainable development in strategic sectors is essential for the region, but high inflation will have a negative effect.
Economic recovery in the region requires addressing structural problems. An endemic problem is institutional weakness. The weakness of social protection networks has been visible during the pandemic, and citizens are demanding a strengthening of these systems. The coming to power of governments with more social approaches in recent months highlights this demand for change. The governments have more social claims, but little political and economic space to make tax and social security reforms that allow them to respond to the demands. There are necessary reforms but they cannot be implemented immediately due to social discontent and the high economic cost they entail. For example, the increase in the tax base through taxes on natural persons and taxes on hydrocarbons generate rejection and end up in protests that destabilize governments. A key factor is to restore citizens’ trust in institutions, which is why anti-fraud and anti-evasion policies should begin and give more transparency to the management of public finances, in order to later advance in improving the progressivity of direct taxes. to people with higher incomes.
A sustainable recovery in LAC that makes it less vulnerable to financial shocks also requires a productive transformation that goes beyond the extractivist and agricultural pattern of international insertion. With the new increase in the price of raw materials there is a risk of falling back into a primary production model, without added value and which is incompatible with sustainable development criteria. While natural riches can be a comparative advantage if well managed, they can be a trap if they become an obstacle to innovation. The recovery focused on the future of LAC requires a productive and educational transformation that incorporates the digital transition. The covid has accelerated the process and has revealed technological gaps that will affect all areas. Latin America still has serious deficiencies in infrastructures for digitization that are also capable of responding to the environmental challenge.
The region must also incorporate the energy transition. LAC has a relatively green energy matrix, with 2/3 of the energy produced by renewable sources, but there will be a growing demand that will have to be resolved with new technologies. Most of the emissions come from the agricultural sector, which will need new, cleaner forms of production that help overcome the extractive model and generate new productive capacities that reduce the vulnerability of the region. Another crucial aspect is urban sustainability. In LAC, almost 80% of the population lives in urban areas with sustainability problems due to hydrocarbon emissions. A key element is to promote efficient urban mobility systems that encourage the development of an electromobility industry with greater added value, better jobs and more innovation.
Digitization and environmental challenges open up transformative opportunities for the region. But to take advantage of them, there must be regulatory frameworks that encourage investment and reduce the high rate of informality. Most LAC countries are middle-income countries that, despite not being among the poorest on the planet, face structural vulnerabilities that generate imbalances, instability and prevent an improvement in the living standards of the population as a whole . These weaknesses stem from the so-called four development traps for middle-income countries: 1. slow growth due to the inability to achieve improvements in competitiveness and productivity; 2. low quality of education and slow transfer of knowledge and innovative ideas; 3. inequality and low social protection, and 4. institutional weakness and lack of stability, transparency and good management. They are elements that feed off each other and must be addressed jointly and for which a social pact is required with the support of an important social majority. The political polarization of the last decade has not made it possible to build these pacts. Perhaps after the lessons of the pandemic, there is still time to avoid a new lost decade.
Anna Ayuso is a senior researcher at CIDOB (Barcelona Center for International Affairs).
