If Latin America’s COVID-19 public-health shock is followed by a protracted economic crisis that leaves many people behind, trust in government and institutions will suffer, and politics will become even more fractured. In that case, the region could yet face a pandemic of instability and hopelessness.
BOGOTÁ/BUENOS AIRES/LONDON – Many regions performed badly when confronted with COVID-19, but Latin America fared worse than most, in terms of both lives and livelihoods lost. As of November 2020, nine of the 20 countries with the highest number of COVID-19 deaths per capita were in Latin America. The International Monetary Fund expected the region’s output to drop by 8.1% in 2020, with only the eurozone suffering a bigger regional decline. As a result, almost 15 million more Latin Americans will live in extreme poverty.
The first explanation for the region’s underperformance that comes to mind is poor leadership. Brazilian President Jair Bolsonaro initially claimed that the pandemic was a media trick. Mexican President Andrés Manuel López Obrador denied for weeks that the coronavirus was a threat and continued to hug and shake hands with supporters, only to reverse course suddenly and impose a strict lockdown. But even in those countries that acted early, containment measures were ineffective at reducing the number of COVID-19 cases. Argentina and Peru, which locked down hard, and Chile and Colombia, which followed a more flexible approach, ultimately suffered similarly dismal health outcomes.
That was partly because Latin America’s starting point was far from ideal. Too many people had pre-existing health problems, and the prevalence of multigenerational living arrangements facilitated contagion and infection of those most at risk. Large informal labor markets made lockdowns hard to enforce. A high incidence of face-to-face jobs, including in retail sales, and a scarcity of remote work opportunities (owing to poor connectivity and low digital literacy) didn’t help, either. Government ineffectiveness left health systems unprepared, despite early lockdowns that postponed the contagion peak.
None of this excuses the fact that many policymakers did too little, too late, but it helps to explain why different strategies yielded similar outcomes. The performance of Uruguay, the region’s sole success story, arguably shows what a combination of universal health-care access, greater labor-market formality and social protection, relatively strong state capacity, and sensible leadership might have delivered for all of Latin America.
Economic Shock
COVID-19 inflicted substantial economic damage on Latin America – not least because the region suffered five synchronous blows. Aside from the initial health shock, economies were hit by a decline in commodity prices, a huge drop in export volumes, loss of remittances and tourism revenue, and unprecedented capital outflows early in the crisis. As a result, many large and small firms ran out of cash and had to close down.
China’s quick economic recovery has since boosted commodity prices, and remittances have picked up, too. But the picture for capital flows remains mixed: While Latin America managed to avoid a lasting panic, private outflows often offset the inflows from issuing government bonds abroad. Mexico likely ran a current-account surplus in 2020, with South America as a whole being close to balance, suggesting that external financing conditions remain tight.
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This current-account performance also indicates that Latin American governments’ countercyclical fiscal spending was insufficient to offset the drop in private consumption and investment. Whereas governments in advanced economies deployed a broad array of discretionary fiscal measures amounting to 20% of GDP, the International Monetary Fund puts the corresponding figure in Latin America at 7%. Only four countries (Peru, Brazil, Chile, and Bolivia) had packages totaling 10% or more of GDP – and this figure includes loans and deferred taxes, in addition to extra public expenditure. Some countries, like Mexico, could have spent more but chose not to, while many others lacked fiscal space or were unable to tap capital markets at reasonable rates.
Latin America’s jobs outlook is also discouraging. Despite government furlough schemes that are still funding temporary employment suspensions and mitigating the destruction of salaried jobs, employment has declined by 10-25% (in Lima, an extreme case, it fell by more than 50% in June 2020). As of September, the region’s employed population had fallen by more than 25.3 million since the start of the pandemic, with women and young people disproportionately affected. Those under the age of 24 have suffered the greatest employment losses, ranging from 5% in Mexico to 44.4% in Chile.
Moreover, there will be no “back to normal” after the pandemic. Digitalization will likely depress demand for contact-intensive occupations and push firms to automate and streamline their operations at the expense of jobs.
Fragile Structures
Overall, Latin America’s underperformance during the pandemic has revealed pervasive shortcomings in state capacity that extend far beyond the region’s obviously weak health systems. A few governments lacked the necessary information to identify poor households and provide them with financial help; others had it, but could only write a check instead of transferring funds electronically. The resulting queues and clusters of people outside bank branches may have contributed to the virus’s spread. And long after schools reopened in Europe and Asia, classes in much of Latin America remained suspended, owing to persistent logistical difficulties. This is adding permanent knowhow costs to the ongoing job destruction – particularly for low-income households.
Another structural weakness is Latin America’s dual labor market, which disproportionately exposes low-income workers to income shocks. About half of the region’s workers are informal wage-earners or self-employed without a college degree; in Bolivia, Nicaragua, Paraguay, and Peru, more than two-thirds of workers are informal. Unable to benefit from wage subsidies and furlough schemes, many of them depended during lockdowns on government cash transfers that compensated for only part of their lost income.
In contrast, many Latin American countries offer generous labor protections to high-wage salaried workers. Colombia introduced a subsidy equivalent to 40% of the minimum wage for all formal jobs in firms that had experienced revenue losses. Argentina’s government went further, doubling severance payments and eventually banning layoffs outright. But such protection goes to a minority of formal employees, while most informal and independent workers remain unprotected. The consequences of this were painfully obvious in the first half of 2020, with incomes of people at the top dropping by much less than those of people at the bottom.
More Trouble Ahead?
The COVID-19 crisis is an opportunity for Latin American governments to strengthen the state, reform dysfunctional labor markets, and accelerate the search for a new social contract. That means rethinking social protection (including by moving toward universal health coverage), reducing barriers to formal employment, and enhancing income stability for independent workers. But the necessary changes are politically difficult. Restructuring government agencies and labor-market rules quickly ruffles the feathers of powerful vested interests, which is why governments of both the right and the left have until now remained on the path of least resistance.
With several Latin American countries scheduled to hold elections in 2021, the crucial question is whether the regional political climate will improve or worsen in the pandemic’s aftermath. A crisis can unite citizens. But the pandemic has also sown plenty of divisions: between professionals who can work from home and factory workers who cannot; between vulnerable elderly people and young people who are subject to government restrictions; and between formal workers who receive wage subsidies and the self-employed who have lost all their income.
Latin America’s virus contagion curve may be flattening, but its poverty and business bankruptcy curves continue to rise. If the public-health shock is followed by a protracted economic crisis that leaves many people behind, trust in government and institutions will suffer, and politics will become even more fractured. COVID-19 could yet become a pandemic of instability and hopelessness.
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BOGOTÁ/BUENOS AIRES/LONDON – Many regions performed badly when confronted with COVID-19, but Latin America fared worse than most, in terms of both lives and livelihoods lost. As of November 2020, nine of the 20 countries with the highest number of COVID-19 deaths per capita were in Latin America. The International Monetary Fund expected the region’s output to drop by 8.1% in 2020, with only the eurozone suffering a bigger regional decline. As a result, almost 15 million more Latin Americans will live in extreme poverty.
The first explanation for the region’s underperformance that comes to mind is poor leadership. Brazilian President Jair Bolsonaro initially claimed that the pandemic was a media trick. Mexican President Andrés Manuel López Obrador denied for weeks that the coronavirus was a threat and continued to hug and shake hands with supporters, only to reverse course suddenly and impose a strict lockdown. But even in those countries that acted early, containment measures were ineffective at reducing the number of COVID-19 cases. Argentina and Peru, which locked down hard, and Chile and Colombia, which followed a more flexible approach, ultimately suffered similarly dismal health outcomes.
That was partly because Latin America’s starting point was far from ideal. Too many people had pre-existing health problems, and the prevalence of multigenerational living arrangements facilitated contagion and infection of those most at risk. Large informal labor markets made lockdowns hard to enforce. A high incidence of face-to-face jobs, including in retail sales, and a scarcity of remote work opportunities (owing to poor connectivity and low digital literacy) didn’t help, either. Government ineffectiveness left health systems unprepared, despite early lockdowns that postponed the contagion peak.
None of this excuses the fact that many policymakers did too little, too late, but it helps to explain why different strategies yielded similar outcomes. The performance of Uruguay, the region’s sole success story, arguably shows what a combination of universal health-care access, greater labor-market formality and social protection, relatively strong state capacity, and sensible leadership might have delivered for all of Latin America.
Economic Shock
COVID-19 inflicted substantial economic damage on Latin America – not least because the region suffered five synchronous blows. Aside from the initial health shock, economies were hit by a decline in commodity prices, a huge drop in export volumes, loss of remittances and tourism revenue, and unprecedented capital outflows early in the crisis. As a result, many large and small firms ran out of cash and had to close down.
China’s quick economic recovery has since boosted commodity prices, and remittances have picked up, too. But the picture for capital flows remains mixed: While Latin America managed to avoid a lasting panic, private outflows often offset the inflows from issuing government bonds abroad. Mexico likely ran a current-account surplus in 2020, with South America as a whole being close to balance, suggesting that external financing conditions remain tight.
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This current-account performance also indicates that Latin American governments’ countercyclical fiscal spending was insufficient to offset the drop in private consumption and investment. Whereas governments in advanced economies deployed a broad array of discretionary fiscal measures amounting to 20% of GDP, the International Monetary Fund puts the corresponding figure in Latin America at 7%. Only four countries (Peru, Brazil, Chile, and Bolivia) had packages totaling 10% or more of GDP – and this figure includes loans and deferred taxes, in addition to extra public expenditure. Some countries, like Mexico, could have spent more but chose not to, while many others lacked fiscal space or were unable to tap capital markets at reasonable rates.
Latin America’s jobs outlook is also discouraging. Despite government furlough schemes that are still funding temporary employment suspensions and mitigating the destruction of salaried jobs, employment has declined by 10-25% (in Lima, an extreme case, it fell by more than 50% in June 2020). As of September, the region’s employed population had fallen by more than 25.3 million since the start of the pandemic, with women and young people disproportionately affected. Those under the age of 24 have suffered the greatest employment losses, ranging from 5% in Mexico to 44.4% in Chile.
Moreover, there will be no “back to normal” after the pandemic. Digitalization will likely depress demand for contact-intensive occupations and push firms to automate and streamline their operations at the expense of jobs.
Fragile Structures
Overall, Latin America’s underperformance during the pandemic has revealed pervasive shortcomings in state capacity that extend far beyond the region’s obviously weak health systems. A few governments lacked the necessary information to identify poor households and provide them with financial help; others had it, but could only write a check instead of transferring funds electronically. The resulting queues and clusters of people outside bank branches may have contributed to the virus’s spread. And long after schools reopened in Europe and Asia, classes in much of Latin America remained suspended, owing to persistent logistical difficulties. This is adding permanent knowhow costs to the ongoing job destruction – particularly for low-income households.
Another structural weakness is Latin America’s dual labor market, which disproportionately exposes low-income workers to income shocks. About half of the region’s workers are informal wage-earners or self-employed without a college degree; in Bolivia, Nicaragua, Paraguay, and Peru, more than two-thirds of workers are informal. Unable to benefit from wage subsidies and furlough schemes, many of them depended during lockdowns on government cash transfers that compensated for only part of their lost income.
In contrast, many Latin American countries offer generous labor protections to high-wage salaried workers. Colombia introduced a subsidy equivalent to 40% of the minimum wage for all formal jobs in firms that had experienced revenue losses. Argentina’s government went further, doubling severance payments and eventually banning layoffs outright. But such protection goes to a minority of formal employees, while most informal and independent workers remain unprotected. The consequences of this were painfully obvious in the first half of 2020, with incomes of people at the top dropping by much less than those of people at the bottom.
More Trouble Ahead?
The COVID-19 crisis is an opportunity for Latin American governments to strengthen the state, reform dysfunctional labor markets, and accelerate the search for a new social contract. That means rethinking social protection (including by moving toward universal health coverage), reducing barriers to formal employment, and enhancing income stability for independent workers. But the necessary changes are politically difficult. Restructuring government agencies and labor-market rules quickly ruffles the feathers of powerful vested interests, which is why governments of both the right and the left have until now remained on the path of least resistance.
With several Latin American countries scheduled to hold elections in 2021, the crucial question is whether the regional political climate will improve or worsen in the pandemic’s aftermath. A crisis can unite citizens. But the pandemic has also sown plenty of divisions: between professionals who can work from home and factory workers who cannot; between vulnerable elderly people and young people who are subject to government restrictions; and between formal workers who receive wage subsidies and the self-employed who have lost all their income.
Latin America’s virus contagion curve may be flattening, but its poverty and business bankruptcy curves continue to rise. If the public-health shock is followed by a protracted economic crisis that leaves many people behind, trust in government and institutions will suffer, and politics will become even more fractured. COVID-19 could yet become a pandemic of instability and hopelessness.