The dramatic Latin American crisis

By José Antonio Ocampo, Professor at Columbia University, and former UN Under-Secretary-General for Economic and Social Affairs and Finance Minister of Colombia

As we ring in the new year, the region needs a new development consensus, committed to reducing inequality, implementing stronger counter-cyclical macroeconomic policies, and spurring production and export diversification – including a major digital transformation. The consensus should accelerate a de-politicised regional integration, push the international environmental agenda forward and renew the region’s commitment to democracy.

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%. According to the International Monetary Fund (IMF), this is one of the worst crises in the world, similar to that of Western Europe and only surpassed by the one India has experienced. The projections of all international organisations and private analysts also indicate that the region’s economy will only partially recover in 2021. As economic growth during the quinquenium 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 deepens a long period of slow economic growth: 2.7% per year in 1990-2019 vs. 5.5% in 1950-1980. This is the poorest performance of any developing region in the world over the past three decades.

The social effects have been devastating. According to ECLAC and ILO, 47 million jobs were lost in the second quarter, and although 12 million were recovered in the third, they were mainly low-quality jobs. As a result, an additional 45 million people will become poor, representing a decade and a half of retrogression in this field. Poor urban households where workers are mainly informal have been hit particularly hard. The positive inequality trends that the region was experiencing in the early twenty-first century were interrupted in the mid-2010s and will now be followed by worsening income inequality. This is an especially negative trend for a region with one of the worst income distributions in the world.

“We must be clear: international factors are not the root cause of the severity of the Latin American economic crisis.” #DevMatters

The crisis is, of course, part of a global phenomenon: the worst world recession since the Great Depression of the 1930s –and a synchronised one. It also combines the demand problems typical of recessions with supply constraints, because many sectors cannot or can only partially function due to the restrictions associated with isolation measures 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 limited in terms of actual resources that have reached the region.

However, private financing 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. 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, and with long maturities. The debt renegotiations of Argentina and Ecuador, which took place in August, were also relatively successful, and counted with 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, 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, and many of them are currently increasing.

“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.” #DevMatters

On the other hand, contrary to the expectation of a sharp decrease in remittances – such as the one that took place in 2009 and took several years to recover, these inflows have increased on average by 5% 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 relatives 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 regional and national factors. First, the region became the global epicentre of the pandemic for several months. Second, as indicated, it hit the region after five years of very poor economic performance –what in a previous op-ed I called a “lost half decade”. Third, because 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, the support is 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. It 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, in other words, to rethink the effects of market reforms, the results of which have been clearly disappointing.

A new agenda –which some of us has referred to as the Latin American Consensus 2020 – should be based on 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 a robust and de-politicised regional integration, and a strong commitment to the international environmental agenda. And this should be done in the context of a firm, renewed commitment to democracy.