By Laura Chinchilla, Former President of Costa Rica & Concordia Leadership Council Member
As we navigate this turbulent time—one that we are unlikely to experience again in our lifetime—I’m immensely proud to sit on Concordia’s Leadership Council. Concordia brings together the right people from a multitude of sectors, industries, backgrounds, and geographies to the same space in order to hold difficult conversations that result in meaningful action. The future of Latin America—and particularly the resilience of its economies, democracies, and healthcare sectors—remains one of these key conversations. Concordia’s fully-fledged Americas Initiative and track record of convening in Colombia set the organization on a strong path to play a role in shaping policy for the future, and if you’re not yet involved, I urge you to be.
The pandemic caused by COVID-19 has highlighted the shortcomings of many countries around the globe in relation to the strength of their institutions, the resilience of their economies, and the quality of their leadership. Although the virus has the potential to affect people across all nations in the same way, its impact on health, economic, political, and social matters will differ from one country to another.
In the case of Latin America, the anticipated consequences look devastating. The repercussions that some countries in this region could face in terms of health, social protection, and productivity—as well as the potential deterioration in fiscal accounts and external indebtedness—will amplify the negative consequences of the crisis and limit the ability of governments to mitigate its effects.
The economic outlook is extremely negative, especially considering that last year growth in the region had slowed in 18 of the 20 countries, reaching an average rate of just 0.3%. The Economic Commission for Latin America and the Caribbean (ECLAC) identifies six key potential effects of this health crisis on the Latin American economy: (i) lower economic activity of the main trading partners, which will reduce exports; (ii) interruption of global value chains, which will limit access to the inputs required for production; (iii) a contraction in demand for tourism services; (iv) a fall in the prices of raw materials and basic products; (v) a deterioration of financial conditions; and, (vi) lower income of foreign currency from remittances from abroad. The impact of these conditions will be a contraction in the economy, which has been estimated by the International Monetary Fund (IMF) to be -5.2%, well below the world average of -3%.
Economic deterioration will have an immediate and profound impact on social matters. The first effects of this have already been felt in the informal sector of the economy, in which the International Labor Organization (ILO) estimates that close to 140 million people work—equivalent to almost 50% of the working population. The most immediate consequence will be a surge in the number of people living in a state of poverty by at least 35 million people (bringing the total from 185 to 220 million individuals). Workers in the formal sector will also be affected, with the unemployment rate potentially nearing 11.5%, meaning that close to 37.7 million people will be unemployed.
Although most countries have announced subsidy measures for populations and businesses in need, the resources available to governments are extremely limited. The accumulation of the fiscal deficit in Latin America during the last decade is near 3%. This situation forced Ecuador to pay USD 326 million of bond capital on March 24, 2020.
Added to this already-complex scenario is the fragility of some political variables that had been manifesting in the years prior to the coronavirus crisis. In recent years, support for democracy in Latin America has weakened as negative perception of government performance has grown. According to the Latinobarómetro, satisfaction with democracy has been steadily decreasing, from 44% in 2008 to 24% in 2018. In response to the question “for whom is it governed?”, 61% of Latin Americans in 2009 stated that “for a few and for personal benefit”. In 2018, the number of people who selected this response had increased to 80%. Anger and dissatisfaction with politics and public institutions turned into violent expressions on the streets of several Latin American cities in 2019, with an explosion of social protests putting the governments of Bolivia, Ecuador, Peru, Colombia, Chile, and others in distress.
Despite the magnitude of these challenges, the region has internal, regional, and international tools that can help it build towards economic and social recovery. Combined with an adequate strategy, these tools can enable Latin America to overcome the most pressing problems posed by today’s pandemic.
The most immediate objective is to contain the health crisis and the speed of contagion of the virus, for which the region has the experiences of Asian and European countries as examples. Although there are some countries in which the levels of contagion have soared, there is also a large group in which the rules of confinement and social distancing have yielded positive results. Countries must simultaneously mitigate declining incomes—especially for the most vulnerable households—while taking action to support businesses and local economies. Both in this area and in healthcare, international financial institutions, such as the Inter-American Development Bank (IDB), are playing a key role in providing governments in the region with rapid access to financing.
Once these stages have been overcome, the most complex task considering economic reactivation will remain. Beyond the shock caused by the new coronavirus, the region has a series of structural problems that will make it difficult for economic growth to accelerate and stability to come about in the medium and long term. To undertake this task, expansionary fiscal and monetary policies that lead to economic reactivation must be promoted, while keeping in mind past errors and the transitory nature of said measures. These policies must be accompanied by a set of measures aimed at substantially increasing the productivity and competitiveness of Latin American nations within the framework of a renewed regionalism, the promotion of public-private alliances, and more transparent, effective, and inclusive institutions.
I believe that we can turn today’s pandemic into an opportunity to review the slow growth of our economies and the lackluster performance of our democracies, and begin the journey towards scenarios of greater prosperity, wellbeing, and stability.