Will Latin America lose the next decade due to the pandemic?
Published: Jan 18, 2021 07:03 PM

People wearing face masks walk on the street in Brasilia, Brazil, Jan. 14, 2021. Brazil has reported 8,324,294 confirmed COVID-19 cases and 207,095 deaths as of Thursday.Photo:Xinhua

As COVID-19 pandemic continues to rage across the world, not only did Latin American countries fail to protect their economies from the deadly crisis, but the inherent structural problems prevalent across the region have been exacerbated. Political wrangling has not slowed down amid the fight against the virus, and the region's economy has lapsed into a deep recession.

Before the abrupt outbreak of the pandemic, major Latin American economies including Brazil and Argentina hadn't completely emerged from the 2008 global financial crisis, and were still struggling with tough fiscal situations. Worse, the sudden lockdown measures to control the virus spread had slammed brakes to the already challenging economic recovery.

The restrict border control, flight suspension and social distancing measures across the world have severely interrupted the world's industrial production chains, supply chain and normal trade in the region. With both weakening supply side and demand side, the troika to promote economic growth - investments, consumption and exports - has almost all lost momentum.

The Economic Commission for Latin America and the Caribbean (ECLAC) said in a recent report that the regional GDP will see a -7.7-percent contraction in 2020, which will likely generate the worst economic crisis in the last 120 years.

Given the multiple strikes of pandemic, natural disasters and political instability, the deficit pressure faced by Latin American countries' current accounts and fiscal accounts have become increasingly prominent.

The Secretary General of the United Nations (UN), Antonio Guterres, warned in December 2020 that Latin America could suffer in 2021 a crisis of sovereign debt due to the expenses necessary to fight the COVID-19 pandemic.

Latin American countries are at the middle- and low- position in the global industrial and value chain. The industrial and financial systems of the region's economies are relatively vulnerable to the impacts of world economy cycle and global market fluctuations. The pandemic has further exposed the weak links of Latin American economies.

The chief factor of Latin American economies' technical recession and cyclical recession has reduced total productivity and slowed capital accumulation. Second, the long-term structural imbalance in governments' relationship with the markets is holding back these countries from getting out of economic crunch. Third, Regional cooperation and sub-regional cooperation have faltered, further exacerbating regional economic difficulties. Some economists pessimistically believe that the Latin American economy will not return to 2019 levels until 2024.

Major Latin American economy Brazil has suffered severe economic damage and life loss from the pandemic. Brazil's President Jair Bolsonaro recently said his country is "broke" and he is unable to do anything about it. 

The pandemic also reflect the limits of the governing architecture of other major Latin American economies such as Argentina and Chile. The increase in unemployed population and the partial return to poverty of the middle class have changed the olive-shaped social structure of these countries. Rising disappointment and anger have intensified social conflicts.

ECLAC noted warned that the coronavirus pandemic could lead to a "lost decade" if income per capita drops to levels not seen since 2010. Under the COVID-19 impacts, political, economic, and social conflicts are intertwined and fermented, and mutually restrict each other, which further delay the Latin American countries' escape from the "middle- income trap."

Although the pandemic is a major factor in the severe economic distress in Latin America, the inherent structural contradictions of most countries in the region, such as single economic structure, inefficient market allocation of resources, and weak government regulation, are the key factors that are pulling down Latin American economies. Promoting economic structural transformation in a timely manner, strengthening innovation capacity building, increasing total factor productivity, and actively integrating into the new round of global industrial revolution and value chain restructuring process are the best approach to break through the bottleneck felt by the Latin American economy.

The author is director of the institute of developing countries at the China Institute of International Studies in Beijing.