COVID-19

The COVID-19 reset Latin America needs, according to three experts

Doctor Bolivar Jalca, who is treating patients experiencing symptoms consistent with COVID-19, poses for a photograph outside Manglaralto Hospital, during the coronavirus disease (COVID-19) outbreak, in Manglaralto, Ecuador, May 2, 2020. REUTERS/Vicente Gaibor del Pino     SEARCH "RURAL ECUADOR COVID-19" FOR THIS STORY. SEARCH "WIDER IMAGE" FOR ALL STORIES. - RC2CSG9MC13O

The pandemic has hit Latin America hard. Image: REUTERS/Vicente Gaibor del Pino

Mauricio Cárdenas
Senior Fellow, Columbia University’s Center on Global Energy Policy
Eduardo Levy-Yeyati
Visiting Professor, Harvard Kennedy School
Andrés Velasco
Professor of Professional Practice, Columbia University's School of International and Public Affairs
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on COVID-19?
The Big Picture
Explore and monitor how COVID-19 is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

COVID-19

  • Latin America's economies have been hit hard by the pandemic and 15 million more of its residents are likely to be pushed into poverty as a result.
  • It exposed two chronic structural weaknesses; the shortcomings in state capacity and the dual labor market of formal and informal jobs.
  • If Latin America is to recover, addressing these issues must be a priority, write Mauricio Cárdenas, Eduardo Levy Yeyati and Andrés Velasco.

The recession that Latin America is now confronting as a result of the COVID-19 pandemic is not a typical economic slump. This year, output across the region will be 10% lower than was forecast in late 2019, joblessness is in double digits, and nearly 15 million more people will now have to endure extreme poverty. Two decades of progress in reducing poverty and inequality are at risk. With living standards collapsing, the wave of social unrest experienced before the pandemic is likely to return.

Have you read?

During the initial phase of the COVID-19 crisis, most governments in the region made the preservation of lives and livelihoods their main priority. They plowed resources into the health sector, provided subsidies to businesses, and supplied households with emergency cash transfers. This was the correct approach, but, as economies gradually began to reopen, a shift in policies became necessary. Moving from economic preservation to recovery will bring new challenges.

Latin America COVID-19 Future of Economic Progress
Two decades of progress in reducing poverty and inequality are at risk. Image: IMF

The pandemic has highlighted two long-standing structural weaknesses in Latin America. The first is pervasive and chronic shortcomings in state capacity. It was not just a lack of fiscal resources, but also the lack of effectiveness in providing government support, that led to the sharp increase in the COVID-19 death toll across the region. Even today, classes and school activities remain suspended in many countries due to unresolved logistical problems. It is easy to imagine what will happen once a vaccine is available: Latin America will lag in the challenge of vaccinating the population at an adequate pace.

The second structural weakness is the dual labor market typical of the region: a minority of insiders who work in stable salaried jobs with access to traditional benefits (paid leave, unemployment insurance, severance pay), and a majority of outsiders who work in precarious, low-wage, high-turnover jobs. During lockdowns, insiders enjoyed job support and furlough schemes, while outsiders depended entirely on cash transfers from governments that compensated them for a mere fraction of their lost income.

This crisis is the region’s greatest opportunity in decades to strengthen state capacity and correct the dysfunction of the labor market. But the necessary changes are politically difficult. The risk is that the region will move in the opposite direction, with a looming fiscal crisis, a slow recovery, and a permanent destruction of “good” jobs that would deepen dualism in the labor market.

Latin America has confronted the macro-financial shock of the pandemic reasonably well. Despite the early capital flight that weakened local currencies, the region has avoided financial collapse and most countries have retained access to international financial markets. Even those in sovereign default, like Argentina and Ecuador, were able to negotiate debt exchanges with unexpected speed.

But the pandemic has been devastating for the real economy: countless businesses, big and small, have run out of cash and been forced to shut down permanently. As firms go under and whole sectors need to be restructured, potential output growth will suffer. This will make it more difficult to reverse the increase in unemployment, poverty, and inequality – and will render the job of balancing fiscal accounts and stabilizing public debt unmanageable.

Unconventional monetary policy is useful but will be insufficient to guarantee a recovery. Countries in the region require surgically precise plans that not only boost demand, but also help relax key supply restrictions and mitigate firms’ financial stress. At the same time, support for workers must be designed to encourage formal employment, and governments should invest in health, education, and infrastructure to help firms and households adapt to the new normal. Public-private collaboration and stable industrial relations will be essential: a healthy recovery is a cooperative game.

The ultimate challenge, as ever, is political. Several Latin American countries have paid a steep price for the populist posturing that dismissed scientific evidence and minimized the threat posed by the virus. These are serious times; they require serious leaders.

Yet national and regional leadership is scarce in fragmented Latin America. To borrow a description by Spanish philosopher José Ortega y Gasset, the region is “invertebrate,” with countries moving in their own directions without much consideration for the rest.

The pandemic has given Latin Americans a harsh reminder of the costs of allowing states to be ineffective and labor markets to remain unfairly segmented. It has deepened old inequalities and created new ones. Infrastructure investment remains weak, and export diversification insufficient.

On these fronts and others, inaction is not an option. Latin America cannot afford another lost decade. As the region begins a new electoral cycle – and after listening to voters instead of lecturing them – political candidates should agree on some core principles for reform. This is a crisis that the region must not let go to waste.

Loading...
Loading...
Loading...
Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:
COVID-19Economic Progress
Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

Winding down COVAX – lessons learnt from delivering 2 billion COVID-19 vaccinations to lower-income countries

Charlotte Edmond

January 8, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum