COVID-19: A look at the economic challenges of Latin America

5 May 2020

[This article was originally published on Southern Voice’s blog on May 4, 2020]

The economic session panel of the virtual conference “Think tanks and COVID-19 in Lati America” ​​looked at the challenges facing the region in light of the current crisis. Verónica Serafini from CADEP (Paraguay), Miguel Jaramillo from GRADE (Peru) and Pedro Argumedo from FUSADES (El Salvador) were part of the panel. Ana Patricia Muñoz from Grupo Faro (Ecuador) moderated it. The researchers analyzed the measures taken in their respective countries.

Talking about Latin America implies talking about heterogeneity. Most countries in the region rank as upper-middle-income economies. However, they are also characterized by their increasing poverty rates and the highest levels of income inequality worldwide. “The expansion of the middle class in the region is a myth,” said Verónica Serafini, of CADEP. In Latin America, the middle class grew in terms of income, but not in terms of social protection. In other words, the region has a rising, but at the same time very vulnerable, middle class. In addition, the highest recorded informality rates exacerbate social inequalities. These aspects are vital in contextualizing the situation in this part of the world and understanding the damage the crisis creates.

The global spread of the pandemic affects Latin American countries differently. Some economies are especially vulnerable. Such is the case of dollarized countries, given the limitation that this represents in their monetary policy. When speaking of vulnerability, it is essential to remember the strong link between the economies of the region and the international markets. Countries dependent on raw material exports, such as oil and minerals, are especially affected. Further factors of vulnerability prevalent among some Latin American economies are high levels of indebtedness and low monetary reserves.

The demand for resources to finance the COVID-19 response is exceptionally high. The more restrictive the measures to contain the pandemic, the greater the need for resources. When thinking about financing options for the coming years, countries must take into account tax collection, the existence and, ideally, the reduction of illicit financial flows as well as levels of public and private debt. Furthermore, the growing need for resources raises new questions about the benefits and levels of transparency that multilateral and bilateral financing systems offer. The characteristics of the public sector, the institutional framework, and the capacity of civil society to audit debt are additional factors to consider when exploring financing options to face the crisis.

Latin American countries have put in place support programs for businesses and households. These range from providing food and making cash transfers to creating funds and plans for business support and recovery. The size and scope of these programs depend on each economy. However, high levels of informality and low levels of bank usage in the region have made it challenging to implement these measures.

A robust financial system, with sufficient liquidity, is key to revitalizing the region’s economy. Now more than ever, it is crucial that the financial operations of each country remain flexible and manage to adapt to the heterogeneous needs of households and production systems.

Without a doubt, the crisis Latin America is facing presents us with multiple challenges. Despite this, the virtual panel discussion ended on a positive note: it emphasized that this can also be an opportunity to lay the foundations for an economy and a functional and universal social protection system in the region.

You can read a summary of the entire conference here.