Fri, Dec 24, 2021 page9

• Latin America’s new lost decade leaves room for optimism

  The region’s economies are expected to be the worst-performing of the post-pandemic world, but the solution might be to focus beyond economic growth

  • By Jose Antonio Ocampo
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  In any other year aside from this one, economic growth in Latin America would give the region’s governments reason to boast. The UN Economic Commission for Latin America and the Caribbean (ECLAC) estimates that GDP growth this year should be about 6 percent, while the IMF forecasts 6.3 percent growth.

  Unfortunately, even the more optimistic projection is insufficient to compensate for the 6.8 percent contraction the region suffered last year.

  Latin America is expected to be the worst-performing region of the developing world as it emerges from the pandemic. Due to very weak growth in the five years prior to the COVID-19 pandemic, the region experienced a “lost half-decade.”

  With last year’s economic collapse, this year’s limited recovery and expected moderate growth for next year (2.9 percent, ECLAC said), it is clear that the region is in the midst of another lost decade of development. If 2023 is similar to next year, average annual growth for the 2014-2023 period could be just 0.7 percent per year — worse than the 1.4 percent annual rate during the lost decade of the 1980s.

  The region’s economic recovery from the COVID-19 crisis also has been very uneven. When this year and last are considered together, Chile and Colombia are the two best-performing larger countries; both are expected to exceed their pre-pandemic levels of economic activity. Brazil and Peru also might do so, but Brazil’s GDP contracted in the second and third quarters.

  Argentina and Mexico are expected to have a lower level of economic activity than in 2019, and the economic collapse in Venezuela has continued. Among the smaller economies, only the Dominican Republic, Guatemala and Paraguay are expected to show higher economic activity this year than in 2019.

  The social effects on the region have been devastating. ECLAC and the International Labour Organization estimate that 25 million jobs were lost in Latin America last year. Just 17 million jobs had been recovered by the second quarter of this year, so employment is still about 3 percent below its pre-crisis level. There are no estimates of this year’s poverty rate, but it reached 33.7 percent last year, ECLAC said, so the region has lost more than a decade in terms of poverty reduction.

  The domestic effects of the pandemic have been much more significant than the international economic shocks in Latin America. Despite the problems with maritime transportation and global value chains, international trade has recovered much faster than after the 2008-2009 crisis. Commodity prices have also shown a strong recovery since the middle of last year.

  Overall, Latin American exports are expected to grow 25 percent this year, thanks to an 8 percent increase in volume and positive trends in export prices. The major exception is tourism, which has experienced an incomplete recovery.

  Capital flows have been a bright spot for those countries that have market access. For the first nine months of this year, Latin American bond issues in global capital markets reached US$124 billion, up 5.6 percent from the same period last year, when issuance also showed a positive trend.

  The cost of such financing has been very low by historical standards, and, contrary to the expectation that the pandemic would undermine remittances from migrants, remittances grew this year and last, particularly from migrants in the US.

  However, the slowdown of most major economies and rising inflation worldwide indicate that global conditions might be less positive in the next few months. The US Federal Reserve has signaled that it would hike interest rates next year, and the European Central Bank is also to tighten its monetary policies. China, a major market for Latin America, faces difficulties caused by the debt problems of its construction sector and some large firms. Also, commodity prices, including for oil, seem to have peaked, but they remain high.

  Moreover, Latin American governments’ fiscal space is to continue to be limited by high debt levels, and the region’s central banks are increasing interest rates from their historic lows to respond to rising inflation.

  In any case, given weak expected economic growth, Latin American governments should avoid contractionary macroeconomic policies. More importantly, they should focus on structural reforms. Taking steps to reduce inequality through social spending and more equitable tax systems would be a good place to start.

  Governments also should encourage active production sector policies and higher-value exports, supported by increased funding for science and technology. Fully adopting the global environmental agenda also would be welcome, and policymakers should embark on a strong push for regional integration, de-politicizing existing processes, and expand their action into new domains, particularly healthcare and pharmaceuticals.

  Last but not least, the region should demonstrate its dedication to democracy. The debt crisis of the 1980s weakened incumbent authoritarian regimes, facilitating democratization, but that commitment is in doubt today.

  Unfortunately, as the International Institute for Democracy and Electoral Assistance highlighted in a recent report, this is a global trend. It is vital that Latin American countries show in upcoming elections that democracy remains a pillar of their development strategies.

  Paradoxically, the best way to overcome Latin America’s ongoing lost decade might be to focus on issues that go beyond economic growth. An agenda that focuses on strengthening democracy, reducing poverty and economic inequality, and protecting the environment is more likely to improve the region’s chances of achieving growth that is more inclusive and sustainable.

  Former Colombian minister of finance Jose Antonio Ocampo, who has also served as UN undersecretary-general, is a professor at Columbia University, chair of the UN Committee for Development Policy and chair of the Independent Commission for the Reform of International Corporate Taxation.

  Copyright: Project Syndicate
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