COVID and Latin America’s Lost Decades

Without change, Latin Americans will go right back to where they were—trapped in the same spiral of economic malaise. Reducing inequality and putting an end to Latin American crises will need more than redistributive policies. They will necessitate getting economies to grow—and to grow more quickly than in the mediocre 2010s. A recent study found that the single most important factor behind the slight drop in inequality in the region during the first decade of this century was not social welfare programs, pension increases, or changing demographics but growth in people’s salaries… the study found that what most effectively caused salaries to rise was plain old economic growth.

By  for FOREIGN AFFAIRS

During the early days of the coronavirus pandemic, in March 2020, Guayaquil, Ecuador’s business capital of some three million people, was in trouble. By a twist of fate, more than 20,000 Ecuadorians had just returned home from their seasonal vacations. Many had come from Italy and Spain, two coronavirus hot spots, with the earliest and most deadly outbreaks of COVID-19. President Lenín Moreno understood that the threat was serious but opted, at first, not to close the country’s airports, instead asking the returning travelers to self-isolate at home. “If people do their part, I think we can control this,” he told me at the time.

[Lea la versión de este artículo en español aquí.] 

But the travelers, many of whom were members of the city’s elite and middle class, mostly ignored the government’s request. Some attended a large wedding, which turned into a superspreader event. When the travelers and their families developed fevers and other symptoms, many sought and received treatment in the city’s generally good private health clinics. But by that point, they had already spread the virus to their maids, to taxi drivers, to the corner grocer—members of the city’s working class.

In the ensuing weeks and months, variations of this story were repeated again and again throughout Latin America: Mexicans returned from ski vacations in Colorado, Brazilians from Italy, Colombians from Miami and beyond. The outcome was almost always the same. Even in countries where governments initially ordered strict lockdowns and quarantines, such as Argentina and Peru, severe outbreaks took hold. According to Johns Hopkins University’s coronavirus database, by the end of October, Latin America was home to seven of the world’s 12 deadliest outbreaks as measured by confirmed deaths per capita. Despite containing just eight percent of the world’s population, the region has accounted for about one-third of known COVID-19 deaths globally.

The economic and social fallout has also been among the world’s most severe. Latin America’s economies are expected to have shrunk by more than eight percent, on average, in 2020, worse than any other major region in the world except the eurozone. Joblessness and hunger have soared. Almost all the progress the region made in reducing poverty over the previous 20 years is at risk of coming undone. Investors and ordinary citizens alike worry that the region is on the verge of a “lost decade” similar to the 1980s, when Latin America suffered from inflation, debt defaults, soaring crime, and a crippling long-term decline in per capita income.

This succession of horrors has already led to considerable soul-searching to identify what made the region so vulnerable. Economists and researchers at institutions such the Inter-American Development Bank (IDB), the Washington, D.C.–based lender where I served as president for 15 years, have published a flurry of analyses and reports. Many have highlighted the region’s low investment in health care; others have pointed to long-standing problems such as insufficient taxation and the lack of access to social safety nets for the high numbers of workers in the black-market economy. Some studies have even focused on Latin Americans’ affinity for personal contact. Still others have emphasized the role of today’s populist leaders, from Brazil’s President Jair Bolsonaro on the ideological right to Mexico’s President Andrés Manuel López Obrador on the left, who have repeatedly downplayed the virus’s severity and the need to wear masks.

All these arguments are important. But they risk missing the bigger picture. The story of how the pandemic unfolded throughout Latin America, with the relatively affluent spreading the virus to a working class that has suffered deaths and economic hardship in far greater numbers, points to an unavoidable truth: Latin America’s COVID-19 crisis is, above all, a crisis of inequality. All over the world, the virus has fallen hardest on vulnerable racial and socioeconomic groups, revealing vast inequalities in access to education, health care, and other resources. It is perhaps little surprise, then, that Latin America, the region with the world’s biggest gap between the rich and the poor, would also be ground zero for the pandemic.

This is a crisis that has been decades in the making, one that therapeutics or a vaccine will not solve. High inequality helped make Latin America the world’s “sick man” even before COVID-19 struck—it is the region with the world’s highest rate of violence and worst-performing economies, and social unrest there is rising. Given these preexisting conditions, the International Monetary Fund (IMF) has projected that per capita incomes in Latin America won’t return to their pre-pandemic levels until 2025, later than in any other part of the world. This has brought to light what everyone in the region should already know: the status quo is unsustainable. The onus is now on the region’s political and business leaders to stop sheltering in walled-off houses and private hospitals and work instead to share their privileges—to pass a new generation of audacious reforms that will, over time, help create more egalitarian, modern, and resilient societies.

My conversations with leaders throughout the hemisphere in recent months have suggested that most realize the gravity of the current moment. Many are ready to embrace profound change—provided it takes place firmly within the bounds of capitalism and democracy and avoids anything resembling the catastrophes in Cuba and Venezuela, where misguided quests for a classless society culminated in even greater poverty and economic ruin. If a different path is possible, it will require a degree of both technocratic skill and political consensus that has sadly been elusive in recent years. But if nothing is done, Latin America will become an even greater source of instability, from which no one—neither its elites nor the United States—will be immune. The idea of a stagnant region awash in street protests, political instability, and organized crime is not some nightmarish vision of a lost decade ahead; it is the reality many Latin American countries are now confronting.

REWRITING HISTORY

Talk to many Latin Americans (and quite a few outsiders) about the vast challenges the region faces today, and you’ll hear a fatalistic view that Latin Americans are somehow incapable of reform or progress, much less the wholesale reinvention the moment demands. This view is not only self-defeating but also factually incorrect. It runs contrary to much of the region’s experience over the last half century.

As recently as the late 1970s, Latin America was overwhelmingly a region of dictators and military juntas. But today, more than 90 percent of Latin Americans live in burgeoning, if imperfect, democracies. The average life expectancy across the region has soared by more than two decades, and at 75, it is higher than the regional average in Asia (73) and just behind those of Europe (78) and North America (79). A half century ago, one in three adults in Latin America didn’t know how to read, and automobiles and airline travel were considered luxuries. Today, the region enjoys a literacy rate of over 90 percent, almost half its citizens ride on a plane at least once a year, and cars are widely accessible (as anyone who has been stuck in traffic in a Latin American city can attest). The percentage of young Latin Americans enrolled in higher education has more than doubled since 1990, a breakthrough no other region of the world has experienced. And in hopeful signs for societies still infamous for their machismo, women now outnumber men enrolled in Latin American universities and account for about a third of the members of the region’s national legislatures.

The first decade of this century saw particular progress, as prices spiked for oil, iron ore, and many other Latin American commodities, thanks primarily to demand from China. Countries including Brazil, Mexico, and Peru reaped the benefits of important pro-market reforms made in the 1990s, which allowed millions of Latin Americans to save, invest, and access credit for the first time. Innovative social programs, such as Brazil’s Bolsa Família, helped distribute the windfall equitably, providing the poor with a small monthly stipend and contributing to the rise of a new, more confident class of consumers. The net result: Latin American economies enjoyed robust growth, and poverty fell sharply, with approximately 50 million people, or about ten percent of the region’s population, joining the middle class.

Latin America’s COVID-19 crisis is, above all, a crisis of inequality.

Unfortunately, talking about these successes today feels a bit like listening to a “greatest hits” album from a band that hasn’t had a breakthrough song in years. The optimism that reigned at the dawn of the 2010s—I was one of several observers talking about the possibility of a “Latin American decade” of even greater prosperity ahead—soon dissipated as a cloud of fiscal mismanagement, corruption scandals, and political dysfunction took hold. The region’s economies grew at an average pace of just 2.2 percent in the decade, well behind the global average of about 3.5 percent and slower than any other major region tracked by the IMF. Today, the boom of the early years of the twenty-first century looks like an exception, a brief spring in a prolonged season of economic underperformance. Consider the following: from 1960 to 2017, Latin America’s real income per capita compared with that of the United States remained practically stagnant, rising from 20 percent of the U.S. level to just 24 percent. In “emerging Asia,” in contrast, a group of countries including China, Indonesia, South Korea, and others, the equivalent number rose from 11 percent to 58 percent. Throughout the world, per capita incomes converged with that of the United States more than three times as fast as they did in Latin America over that nearly 60-year period. In that light, the region’s relative progress looks much less impressive.

Inequality is by no means the only explanation for this long-term malaise. But it does underlie many of Latin America’s worst shortcomings, from its high crime rate to its penchant for populist leaders to its inadequate rate of investment as a percentage of GDP, which is among the lowest in the world. Before the pandemic, the richest ten percent of Latin Americans were estimated to hold approximately 70 percent of the region’s wealth. In recent years, as inequality rose in the United States and Europe and those societies began to more closely resemble Latin America, numerous studies explored the corrosive, long-term effects of such large wealth gaps on politics and economic growth. Some of the academic literature has also focused on how inequality takes a particular toll on trust in societies, which can in turn depress everything from foreign investment to innovation to entrepreneurship. People in Latin American countries, unsurprisingly, express some of the world’s lowest levels of confidence in one another, with just four percent of Colombians, seven percent of Brazilians, and 12 percent of Mexicans agreeing with the statement “Most people can be trusted.”

ON THE OUTSIDE LOOKING IN

By the fall of 2019, public anger over years of stagnation had reached a boiling point. Widespread street protests broke out everywhere from Chile to Colombia to Ecuador and beyond. The demonstrators were mostly peaceful, but numerous episodes of violence and property damage, including arson—an 18-story building and several subway stations in downtown Santiago, Chile, were set on fire—made headlines all over the world. The reasons for the unrest varied, including the deeply existential and the very local. In Chile, for example, the immediate trigger was an increase in the standard bus fare of 30 Chilean pesos, or about four U.S. cents, which raised the cost to about $1.17 per ride. This may not sound like a sufficient reason for such dramatic unrest, but the demonstrations led to an airing of numerous other grievances. In interviews, the protesters repeatedly cited substandard health care and pensions and, above all, a familiar issue: the gap between the rich and the poor and the feeling that much of Chilean society was trapped on the outside looking in, unable to get to the promised land of middle-class prosperity. “It’s not about 30 pesos; it’s about 30 years,” one slogan went, referring to the policies Chile had adopted since the 1980s.

This rhetoric prompted an extraordinary backlash, especially among business elites across Latin America. Chile had long been regarded as the region’s great success story. In many respects, it was—and not just in ways that pleased so-called neoliberals. During the 1990s and the first decade of this century, Chile’s economy often grew at a rate of more than six percent annually, and poverty fell sharply, from 39 percent to eight percent. Life expectancy rose to the highest in South America, 80 years, and the number of students enrolled in higher education soared from 250,000 to 1.2 million. In this context, the protests initially seemed almost impossible to understand from the outside. As the demonstrations grew larger, virtually everyone in the region—whether Argentine, Brazilian, Guatemalan, or Mexican—had a strong opinion about the unrest in Chile. Many believed the protesters were a bunch of spoiled brats, millennials who had spent too much time on Instagram and harbored delusional expectations about turning Chile into a Scandinavian-style welfare state.

At the IDB, we, like many observers, were caught off-guard by the protests. But the data revealed that the demonstrators’ grievances had genuine substance. Chile’s life expectancy, for example, was a classic case of “the tyranny of averages,” hiding tremendous disparities. For example, in Santiago, Chile’s capital, a poor woman born in a low-income area was expected to live a far shorter life—by a staggering 17.7 years—than a wealthy woman from another part of the city, according to a Lancet study published in 2019. It also became clear that despite the tremendous growth of higher education in Chile and other countries over the previous 20 years, social mobility remained extremely elusive. A study published in 2018 by the Organization for Economic Cooperation and Development looked at dozens of countries around the world to estimate how long it usually took a poor person to rise into the middle class. In Nordic countries such as Denmark and Sweden, it typically took two or three generations, the study estimated. The average among OECD members was four and a half generations. But in Chile, it took six generations; in Brazil, it took nine; and in Colombia, it took 11—the worst of all the countries surveyed.

A demonstrator in Santiago, Chile, December 2019
Jorge Silva / TPX Images of the Day / Reuters

These studies, plus many others, pointed to younger generations across Latin America who often tried to “do the right thing”—that is, they studied much longer than their parents had and worked hard—but they still found it difficult or impossible to break into the middle class. Many would retort that this isn’t surprising; the region has suffered from high inequality for decades, if not centuries. But two new factors have roiled Latin American societies. One is social media, which has opened a bigger window into what a real middle-class existence looks like at home and around the world. And the other, perhaps perversely, is the prosperity of the first decade of this century. The tens of millions of Latin Americans who rose out of poverty during that period are absolutely determined to see their lives continue to improve, and they are willing to fight for it.

Ultimately, in the case of Chile, the country’s power brokers saw that defending the status quo was impossible. The first lady of Chile, Cecilia Morel, spoke for many when she said in a private audio message to a friend that was later leaked to the Chilean press, “We’re going to have to diminish our privileges and share with everyone else.” Her husband, President Sebastián Piñera, soon came around to this view. He apologized to Chileans and declared a 20 percent increase in the baseline pension and a higher minimum wage. Most dramatic of all, Piñera announced that Chile would hold a referendum on whether to write a new constitution that would attempt to provide better guarantees for public services and social mobility. A year later, in October 2020, 78 percent of Chileans voted yes. A new charter is scheduled to be put to a popular vote in 2022.

Such a process carries risks. There is a chance that Chile, in trying to address its inequalities, will end up promising citizens more than it can afford and kill the very engine that made its economy so dynamic in previous years. And guaranteeing rights and privileges in constitutions does not necessarily conjure them into existence, as the progressive charters of Bolivia, Brazil, and Venezuela prove.

Nevertheless, the overwhelming result of the referendum speaks to the strong desire for change and the willingness of Chile’s establishment to meet the current moment. In other countries, the protests have died down, but most observers believe that is mainly because of the need for social distancing due to COVID-19. Indeed, the pandemic may have cooled the protests in the short term, but observers expect that over time, it will make the underlying grievances, and the pervasive inequality itself, dramatically worse. Not every country will need full-fledged constitutional reform. But without change, Latin Americans will go right back to where they were—trapped in the same spiral of unrest, political dysfunction, and economic malaise.

ALL ELSE EQUAL

Discussions of inequality and efforts to address it generate tremendous skepticism and fear in Latin America—and not just among elites. It is easy to understand why. Guerrilla groups and armed movements such as the FARC (Revolutionary Armed Forces of Colombia) and the Shining Path in Peru, to name just two examples, committed some of the worst atrocities in the region over the last 100 years in the name of eliminating the gap between the rich and the poor. More recently, Venezuela’s disastrous efforts under Presidents Hugo Chávez and Nicolás Maduro to pursue a classless society through expropriations and unsustainable spending ultimately chased away businesses, private investment, and most of the middle class. The result has been one of the biggest economic collapses in the history of the modern world outside wartime. Any viable efforts going forward will have to keep history from repeating itself and combine the best ideas from the democratic left, center, and right. In some countries, that will mean higher taxes for the most well-off members of society. The idea is far from a socialist solution, as even the IMF has recently embraced the need for higher income taxes and corporate taxes in many countries. Many Latin American countries were already struggling with insufficient resources prior to the pandemic. The average tax take in the region was 23.1 percent of GDP in 2018, compared with an average of 34.3 percent among the members of the OECD, a group of mostly wealthy countries. Countries such as Guatemala, Mexico, and Peru had tax-to-GDP ratios in just the midteens. Meanwhile, the average tax rate on the highest income bracket in Latin America that same year was just 26.7 percent, with no country taxing its highest earners above 35 percent.

Raising taxes will be politically challenging, but there is precedent for Latin American elites willingly contributing when they believe a crisis demands it and when they trust that the money will be used for a worthwhile end. In 2002, when Colombia’s government faced a severe security and budget crisis, President Álvaro Uribe built a consensus around a one-time 1.2 percent tax on liquid assets for the highest-income individuals. Uribe accomplished this by meeting on numerous occasions with business leaders to explain the need for the tax, explicitly earmarking the income for a specific cause, and allowing those taxed to monitor how it was being spent nearly in real time. This is a model many countries could pursue today. In countries where taxes are already high, such as Argentina and Brazil, budget reform will be necessary to ensure that the resources are directed toward health care, education, and investment instead of bloated government payrolls or unsustainable pensions. Brazil’s 2019 pension reform, which slashed what had been some of the world’s most generous retirement benefits, was a positive step in that direction.

Another option worth considering is an expansion of the social programs that proliferated during the first decade of this century. During the pandemic, Brazil has again turned out to be a leader in this area. Bolsonaro’s right-wing government provided many citizens with a stipend of 600 reais, or about $115, a month through August (the amount has since been reduced). This was transformative for millions of people, and extreme poverty actually fell in Brazil in the early months of the pandemic. The payments also buoyed consumer spending and thus helped shield Brazil’s overall economy, which likely contracted less than the economies of other large countries in Latin America in 2020. Making such a program permanent for a fifth of Brazil’s population would cost approximately $70 billion a year, a hefty price tag. But it is worth noting that prior to the pandemic, Latin American countries were spending, on average, just 1.6 percent of their GDPs on cash transfers and noncontributory pensions, about one-third as much as the average OECD country spends. In other words, there may be room to expand the safety net in a way that protects the most vulnerable and still supports economies as a whole.

Without change, Latin Americans will go right back to where they were—trapped in the same spiral of economic malaise.

But ultimately, reducing inequality and putting an end to Latin American crises will need more than redistributive policies. They will necessitate getting economies to grow—and to grow more quickly than in the mediocre 2010s. A recent study found that the single most important factor behind the slight drop in inequality in the region during the first decade of this century was not social welfare programs, pension increases, or changing demographics but growth in people’s salaries. Just as interesting was what caused salaries to rise and what didn’t. The study found that government efforts to mandate minimum-wage increases helped salaries across the board grow in some places, such as Brazil, but not in others, such as Peru. Instead, the study found that what most effectively caused salaries to rise was plain old economic growth.

Achieving economic growth will mean enacting a long, varied, and often unglamorous list of reforms—including cutting red tape and boosting investment in clean energy and other green infrastructure. Concrete steps to engage more women and members of marginalized racial groups in Latin American economies would also boost growth; a recent McKinsey study estimated that closing the gender gap in Latin America would yield an economic dividend of some $1.1 trillion by 2025. Trade is another major area for improvement. Latin America accounts for just five percent of global commerce, and Argentina and Brazil rank among the world’s most closed economies. In the age of Brexit and other nationalist currents, many Latin American countries are reaching out their hands at precisely the moment the developed world is pulling theirs away. But Latin America should still try to promote trade, in part because the region’s citizens demand it. A recent IDB study showed that despite loud protests by labor unions and other entrenched interests, 73 percent of people in Latin America want more trade with the rest of the world. Although the results in individual countries varied, support in every country surpassed 50 percent.

Indeed, for many countries, recovery will also mean deepening their partnerships with the United States. The pandemic called attention to the dangers of depending too heavily on faraway suppliers in Asia for medical supplies and other goods. There is a clear bipartisan appetite in Washington and in corporate America for shifting many supply chains back to the Western Hemisphere, raising the prospect of a shared economic recovery that is “made in the Americas.” Washington might also consider providing some of Latin America’s most vulnerable countries, namely, the Central American states of El Salvador, Guatemala, and Honduras, with direct economic aid. But first, the United States will need to ensure that those countries’ governments are prepared to spend the funds responsibly. And most of Latin America will have to pick itself up on its own.

THE ALTERNATIVE PATH

The most important change of all is a change in mentality. Recent years have revealed that the status quo isn’t working for anyone: not for the poor, certainly, but also not for the wealthy. Many Latin Americans from all walks of life are interested in leaving, in emigrating to Miami, New York, or wherever they feel they can live in peace. A 2018 Gallup poll showed that 27 percent of people in Latin America and the Caribbean would leave their home country if given the choice, a percentage nearly double the global average. The alternative path to mass emigration—and the far better path—is dialogue, consensus, and, ultimately, reform. But even in the best case scenario, Latin Americans will have to be patient and realize that even the most rapid change will take years to fully bear fruit. Latin Americans don’t have to make every change tomorrow, but they need to get started today.

The region is not alone in facing these challenges. The world has been shaken by COVID-19, revealing deep global inequalities. But other countries that faced deep structural problems in the past, from Spain and the United Kingdom in the 1970s to Germany in the 1990s, rose to meet the moment and are in some ways unrecognizable today. Perhaps it is now Latin America’s time to lead and show the world that a better, more equal path is possible. The pandemic will leave a painful legacy of death and suffering. But if it helps compel Latin America to meaningfully address challenges the region has faced for centuries and ultimately produce fairer societies, that will help atone for some of the pain.

SUBSCRIBE TO FOREIGN AFFAIRS

Please spread the word and share: