Latin America is a region that, for many decades, has offered the image of holding enormous potential and that, however, has been unable to consolidate the definitive takeoff of its economic activity and levels of well-being. In the analysis of the roots of this paradox, the dependency theory made its appearance in the sixties and seventies, which, from a Marxist perspective, placed development and underdevelopment as the two faces of the same reality; a vision for which only the profound change in structures allows access to better living conditions. There was also the center-periphery structuralist theory of inspiration keynesian recommended by ECLAC, arguing that the solution was found in industrialization as a way to modify the peripheral role of Latin America. And there have also been the functionalist theories of economic dualism, for which, within Latin American societies, an archaic-traditional economy coexists with a modern one, and that they have proposed – both through state intervention and structural reforms that stimulate the market economy — the incorporation of the traditional sector into the modern dynamics of society. However, and despite their different nuances, what all these views converge on is that it is the deep economic and social inequalities that characterize Latin American countries that seem to be the main brake on growth and social advancement.
Despite public policies carried out from different ideological perspectives and theoretical angles, Latin America has not managed to build that moment that creates the definitive impulse of its societies and that prevents the recurring cycle of advance-regression. First was the regression caused by the debt crisis in the 1980s – the notorious “lost decade” – which consumed some of the progress recorded since the postwar period. Then there was the global economic crisis of 2008, which extinguished part of the recovery of the last decade of the last century and the dawn of this. And now, the crisis caused by covid-19 has set up a deteriorating scenario that anticipates a new setback in the parameters for the generation of wealth and well-being.
The pandemic has been especially severe in Latin America. Despite grouping barely 8% of the world’s population, Latin America concentrates a fifth of infections and one in three deaths globally; All this with at least half of the countries in the region in a situation of growing infections, vaccination advances at half the average of developed countries, and a herd immunity that is not in sight until a period close to a anus. During 2020, the Latin American economy decreased by 7%, more than double the decline registered by the global economy and the largest since the end of the wars of independence at the end of the first quarter of the 19th century.
The economic contraction in the region was amplified by several factors. First, health systems that have deteriorated hand in hand with the erosion of public finances in the countries of the region and whose deficiencies have been exposed by the pandemic. Second, an economic policy incapable of limiting the negative effects of the crisis on the real economy: on the one hand, despite the fact that expansionary monetary policies were implemented, the low penetration of credit limited its effect on the productive fabric; and, on the other hand, while the average package of fiscal support in developed countries imported 19% of GDP, the average for Latin America was 8.5% and with a high concentration in a few large economies, since two out of every three countries in the region implemented programs that did not reach 3% of GDP. Third, a sectoral structure strongly concentrated in services and labor informality – areas most affected by the nature of the crisis – leading to the loss of one in ten jobs in the region. And, finally, the harsh impact of the crisis has also been explained by poor management of the pandemic associated with poor governance, in which technical-health considerations were often subordinated to others of a political or electoral nature, restricting the effectiveness of actions to contain the effects on both the economy and the health of the population.
In this way, the balance of the crisis in Latin America is being disproportionate. In the economic dimension, the region will not be able to reach the levels of wealth generation prior to the pandemic until 2023 or 2024, and, from the social perspective, well-being conditions have deteriorated again, with an income reduction equivalent to 10% of GDP as a result of job losses, and with more than 35 million people who will have been added to a situation of moderate or extreme poverty. And this, unfortunately, is only a preliminary balance, since there are still significant risks on the horizon: outbreaks of the pandemic, greater private leverage and public debt in the environment of a possible monetary normalization, and second-degree effects derived from a potential retransmission of the crisis through the financial channel, among others.
The old Latin American narrative now reappears hand in hand with a health risk still out of control, the deterioration of the productive structure and employment, fiscally weaker and politically more fragile governments, and the increase in poverty and inequality. It is the combination that has previously proven to be the seed of latent social unrest and that opens the false door of populism. Therefore, the current time is a key time for the region, in which public policies that stimulate sustained growth based on institutional strengthening, a more determined integration into the global economy and greater regional cooperation could be the keys to, in a structural dimension, begin to create the foundations so that economic and social advances are solid enough to prevent new adverse situations from being translated into periods of setback and loss. In the words of the Mexican poet Octavio Paz, Latin America “is not so much a tradition to continue as a future to realize.” The statement, not only in its rhetorical meaning but also in its historical sense, remains true to foreshadow the future of this region of the world.
Manuel Aguilera placeholder image is CEO of Mapfre Economics.