COVID-19 : Towards another lost decade in Latin America?

June 29, 2020 

By Elisa Aracil - Professor at the Department of Economics, Universidad Pontificia Comillas

This article first appeared in The Conversation

The International Monetary Fund estimates that Latin America will experience an economic contraction this year equivalent to what happened after the crash of the 29th. Specifically, a devastating drop in GDP of 5.2% is expected in 2020, compared to an expected growth of 1, 8% in pre-COVID-19 estimates.

However, the post-COVID outlook may not be as catastrophic. There are two reasons for the dramatic decline in 2020, but also the possible recovery in 2021 to avoid the curse of another lost decade.

The first is the evolution of the economic effects of a pandemic, much faster than in crises derived from other reasons (for example, financial crises whose effects are visible for long periods).

When China sneezes, Latin America constipates

The second is due to reasons intrinsic to the region, such as its strong dependence on the price of raw materials (the region's main export), tourism (especially in the Caribbean) and the China-Latin America link. That is, when China sneezes, Latin America is constipated, and to a much greater extent than what happens in other regions.

Most Latin American countries are major exporters of raw materials. The collapse in the product markets, especially in the price of oil, puts Venezuela, Ecuador, Mexico, Colombia, Brazil and Argentina in serious difficulties.

Vaca Muerta farms in Argentina and Pemex in Mexico are unfeasible at the current price of a barrel. For its part, in countries like Venezuela or Colombia, oil accounts for 90% and 40% of legal exports, respectively.

The sharp drop in the price of other products has also wreaked havoc. For example, copper is a cause for concern in Chile (the world's leading exporter) or Peru, as exports rise to 30%.

On the other hand, the region depends closely on the economic evolution of its main partners: China and, to a lesser extent, the United States. This dependence is manifested in the participation of Latin American countries in global production chains, paralyzed due to quarantines and mobility restrictions.

Brazil and Mexico have had to stop their production chains in the automobile or electronics sector due to the paralysis of Chinese suppliers of intermediate products.

Likewise, the fall in demand from China and the United States has shaken the region. For example, 80% of Mexico's GDP is linked to US activity, and other large economies in the area, such as Peru, Brazil and Argentina, have Asia as the main recipient of their products.

Structural weaknesses

To further complicate matters, the economic impacts of the pandemic could be accentuated by existing weaknesses in the region. For example, the political instability and social unrest after the massive protests in Chile and other countries, the economic stagnation in 2019 (GDP without growth) and some old acquaintances, such as high levels of corruption and inefficiency in public administrations. Furthermore, infrastructures are known to be precarious (specifically those related to public health).

In fact, only Costa Rica and Uruguay follow the recommendations of the World Health Organization and allocate 6% of GDP to health.

Will the post-COVID scenario be so dramatic for Latin America? Let us focus attention not so much on how deep the contraction will be, but on the speed of recovery.

Recoveries after a pandemic are faster: For example, global international tourist arrivals grew again in just five months after the SARS epidemic, a much shorter period than after the 2008 financial meltdown. expedited and global actions by central banks and governments will increase the effectiveness of the measures in this crisis.

The banking sector, part of the solution or the problem?

The health of the banking sector in the region, with good levels of provisions, this time will be part of the solution and not part of the problem.

On the other hand, the strong dependence on international trade and the prices of raw materials means that the fortune of Latin America is necessarily linked to what happens in China and the US. The global de-escalation will boost demand for raw materials and dynamism in international trade.

There are those who argue that China will be in worse conditions than in the past to help Latin America. However, China will be the only large economy, along with India, that are expected to grow in 2020 .

On the other hand, China contributes much more than international trade. It is also a major issuer of foreign direct investment in the region, and its huge Belt and Road project is a major catalyst for demand for raw materials.

The social impact of the pandemic

Another different issue is the social impact of the pandemic, which will surely be profound due to the high informality in the region (the IMF estimates that 50% of total jobs are in the shadow economy). This hinders the effectiveness of social policies by leaving many informal workers without any coverage during the pandemic.

This being the case, the region has a great opportunity to emerge from this crisis by linking, for example, national or international aid to investment to the necessary improvement of public services and infrastructure and the adoption of environmental measures. These are necessary structural reforms to never again experience another lost decade.