Latin America’s New Lost Decade

NEW YORK – In any other year but this one, economic growth in Latin America would give the region’s governments reason to boast. The United Nations Economic Commission for Latin America and the Caribbean (ECLAC) estimates that GDP growth in 2021 will be around 6%, while the International Monetary Fund forecasts 6.3% growth. Unfortunately, even the more optimistic projection is insufficient to compensate for the -6.8% contraction the region suffered in 2020.

Latin America will be the worst-performing region of the developing world as it emerges from the pandemic. Due to the very weak growth in the five years prior to the COVID-19 pandemic, the region experienced a “lost half-decade.” Now, with the economic collapse of 2020, the limited recovery of 2021, and expected moderate growth for 2022 (2.9% according to ECLAC), it’s clear the region is in the midst of another lost decade of development. If 2023 is similar to 2022, average annual growth for the 2014-23 period could be just 0.7% a year – worse than the 1.4% annual rate during the lost decade of the 1980s.

The region’s economic recovery from the COVID-19 crisis also has been very uneven. When 2020 and 2021 are considered together, Chile and Colombia are the two best-performing larger countries; both are expected to exceed their pre-pandemic levels of economic activity. Brazil and Peru also may do so, but Brazil’s GDP contracted in the second and third quarters. Argentina and Mexico will have a lower level of economic activity than in 2019, and the economic collapse in Venezuela has continued. Among the smaller economies, only the Dominican Republic, Guatemala, and Paraguay will show higher economic activity in 2021 than in 2019.

The social effects on the region have been devastating. ECLAC and the International Labor Organization estimate that 25 million jobs were lost in Latin America in 2020. Just 17 million jobs had been recovered by the second quarter of this year, so employment is still about 3% below its pre-crisis level. There are no estimates of the poverty rate for 2021, but it reached 33.7% in 2020 according to ECLAC, so the region has lost more than a decade in terms of poverty reduction.

The domestic effects of the pandemic have been much more significant than the international economic shocks in Latin America. In fact, despite the problems with maritime transportation and global value chains, international trade has recovered much faster than after the 2008-09 crisis. Commodity prices also have shown a strong recovery since the middle of last year. Overall, Latin American exports are expected to grow 25% in 2021, thanks to an 8% increase in volumes and positive trends in export prices. The major exception is tourism, which has experienced a very incomplete recovery.

Capital flows have been a bright spot for those countries that have market access. For the first nine months of 2021, Latin American bond issues in global capital markets reached $124 billion, up 5.6% from the same period in 2020, when issuance also showed a positive trend. The cost of such financing has been very low by historical standards. And, contrary to the expectation that the pandemic would undermine remittances from migrants, remittances grew in both 2020 and 2021, particularly from migrants in the United States.

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But the slowdown of most major economies and rising inflation worldwide indicate that global conditions may be less positive in the next few months. The US Federal Reserve has signaled that it will hike interest rates in 2022, and the European Central Bank will also tighten its monetary policies. China, a major market for Latin America, faces difficulties caused by the debt problems of its construction sector and some large firms. And commodity prices, including for oil, seem to have peaked, but they remain high.

Moreover, Latin American governments’ fiscal space will continue to be limited by high debt levels. And the region’s central banks are increasing interest rates from their historic lows to respond to rising inflation.

In any case, given weak expected economic growth, Latin American governments should avoid contractionary macroeconomic policies. More importantly, they should focus on structural reforms. Taking steps to reduce inequality through social spending and more equitable tax systems would be a good place to start. Governments also should encourage active production sector policies and higher-value exports, supported by increased funding for science and technology. Fully adopting the global environmental agenda also would be welcome. And policymakers should embark on a strong push for regional integration, de-politicizing existing processes, and expand their action into new domains, particularly health care and pharmaceuticals.

Last but not least, the region should demonstrate its dedication to democracy. The debt crisis of the 1980s weakened incumbent authoritarian regimes, facilitating democratization. But that commitment is in doubt today. Unfortunately, as the International Institute for Democracy and Electoral Assistance (IDEA) highlighted in a recent report, this is a global trend. It is vital that Latin American countries show in upcoming elections that democracy remains a pillar of their development strategies.

Paradoxically, the best way to overcome Latin America’s ongoing lost decade may be to focus on issues that go beyond economic growth. An agenda that focuses on strengthening democracy, reducing poverty and economic inequality, and protecting the environment is more likely to improve the region’s chances of achieving growth that is both more inclusive and more sustainable.

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