Covid-19 hits an economically weak and deeply unequal Latin America

Will Latin American economies returning to “normal” or build for a more equitable future after the pandemic? Español Português

Anna Grugel Smith
7 May 2020, 12.01am
Chatterjee Debarchan/ABACA/ABACA/PA Images

The horror of war” is how Cynthia Viteri, Mayor of Guayaquil, Ecuador, described the effects of Covid-19 on Guayaquil, Ecuador, one of the cities worst affected by Covid-19 in Latin America. Recovering from the ‘war’ will require not just a humanitarian response but a strategy to face up to the economic losses caused by the pandemic.

Much has been said about the short-term impacts of the virus. As yet, not enough attention is being paid to Latin America’s capacity to absorb the long-term economic impacts of Covid-19. Although the full cost to the region’s economies is not yet clear, it seems almost certain that the economic and financial implications will push Latin America into a recession, one that is likely to be on par or worse than the 2008 global financial crisis.

Why will the crisis be so profound and how will the region exit from it? One reason is the structural vulnerability of Latin American economies exacerbate the costs of the pandemic. Even when growth takes place in the region, the benefits are felt unevenly across society. Exiting the economic crisis caused by pandemic equitably will demand planning by governments and international and regional organisations to move the region away from the economic ‘normal’ towards inclusive development for the long term.

The economic costs of the pandemic

Estimates indicate that COVID-19 may cost the world more than $10 trillion .The International Labour Office (ILO) suggests that it will lead to a loss of 195 million jobs worldwide. In Latin America, the Economic Commission for Latin America and the Caribbean (ECLAC) estimates a contraction of 1.8% in regional GDP, an increase in unemployment of 10%, an increase in the numbers of poor people in the region from 185 million to 220 million and of the very poor from 67.4 million to 90 million (out of a total 620 million inhabitants. ECLAC also predicts rising lower wages and unemployment could follow bankruptcies and weak prospects for growth as immediate consequences from the pandemic.

The costs of the recession will undo almost all the benefits in the region in terms of more equitable growth in the earlier part of the twenty first century. As with other health crises, the Covid-19 pandemic is exacerbating inequalities, with the poorest more likely to have chronic conditions which increases their risk of death, disability and loss of income. We already know, for example, that the lockdown measures in the region have impacted most severely in the poorest.

The structural weakness of regional economies

The reason Covid-19 will have such a devasting effect is in good measure because of long structural failures in the regional economies. Inequality is a feature of all regional economies, with or without economic growth. The 2013 World Bank Report Shifting Gears to Accelerate Shared Prosperity pointed out that although inequality had reduced, growth levels in the region would take 41 years to close the inequality wage gap to European levels.

Tax revenue is, on average, only around 22% of GDP in Latin America, compared to the OECD average of 34%. It is as low as 16% in Mexico and 12% in Guatemala. This leaves economic performance dependent on export growth, and vulnerable to sudden drops in commodity prices and world demand.

Oil prices shrunk by 50% in 2020, before Covid-19, and are now sitting at their lowest level since 1973. This is a blow for some of the largest economies of the region, including Brazil, Colombia, Mexico, Ecuador and Venezuela. Copper, soy prices and those of other commodities are also falling, meaning that the region will have to try and recover from Covid-19 from a weak position as demand for the region’s exports is unlikely to recover immediately.

The region needs urgently to articulate a strong response through planning for equitable development

The gains from the early years of the twenty first century are increasingly fragile. Although Oxhorn noted, between 2000 and 2010, the Gini coefficient declined in thirteen of seventeen Latin American countries, these recent gains are now more at risk than ever. If Latin American governments adopt austerity policies, there is also a danger of economic crisis is also turning into a political crisis.

It’s time to move away from unequal growth towards planning for equitable development

The World Bank has announced a $14million fund for developing countries to address the costs of the pandemic with the first round of support for the Latin American region projected to be in order of $100 million and an additional $170 million through redirecting projects to address Covid-19 needs.

Beyond this, many governments have taken measures. For example Chile have announced a $12 billion economic plan. But this tranche of funding will only address immediate needs. It does not provide resources to deal with the long-term costs of the health crisis and it will not change the increasing levels of inequality or the way Covid-19 has exacerbated inequalities. At most, it might provide a short-term safety net for those who in most desperate need.

The region needs urgently to articulate a strong response through planning for equitable growth. The long-term damage to regional economies and to the most vulnerable, alongside the structural problems with the Latin American economies and the political failures of some governments, highlight the need to change after the crisis not simply focusing on a return back to normal.

In response to the pandemic, ECLAC has recently published a manifesto for change and more equal development, and this should be taken seriously. ECLAC’s proposal focuses on the need for drastic long-term economic reforms to address underlying economic problems, as well as the current COVID-19 crisis. In particular, ECLAC draws attention to the need for effective and inclusive welfare reform, alongside the need for growth.

As ECLAC says, even before the crisis, the region had inadequate social protection, lacked unemployment benefits and an unjust organisation of social care. Alongside widespread political instability, these hinder sustainable and inclusive growth and reduce the chances of the region meeting the Sustainable Development Goals by 2030.

ECLAC recommends a cohesive and coordinated response from governments that includes the strengthening of social protection systems in order to support vulnerable populations.

It is time for the region to consider reforms to try to emerge from the pandemic with a bright future. These reforms could go as far the introduction of universal basic income as a way of reducing inequality and enabling those who are paying a high price for stabilising the spread of Covid-19 in the region by not working to come out of the pandemic with a future.

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