In Latin America, where economic problems tend to be more destructive than elsewhere of the Western world, the future economic, political and social stability will be highly dependent on governments’ responses to the coronavirus pandemic. As foreign capital and investments diminish and a global recession is looming, Latin American countries are facing a distressing outlook, which will inevitably lead to a major societal restructuring.
Evidently, the coronavirus has led all countries and international organizations to redefine their plans and redirect available resources to respond to the health, economic and social crisis triggered by the pandemic. According to BBC, the managing director of the IMF, Kristalina Georgieva, stated that “the world is facing the worst economic crisis since the Great Depression of the 1930s” (2020).
In Latin America and the Caribbean (LAC), it was at the beginning of March when the first cases of COVID-19 were detected. In response, regional governments introduced compulsory or voluntary confinement measures in order to stop the spread of the virus and mitigate its economic and social effects. Therefore, in this article, we will attempt to describe the economic and social outlook facing the region in the coming months and years. Certainly, the harm to outputs, wealth gaps, and debt situations will be highly dependent on how the governments react to the issues at hand.
The pandemic is causing the most severe economic contraction that the region has experienced since records began in 1900, as stated in the Report on the economic impact of coronavirus disease on Latin America and the Caribbean by the UN Economic Commission for Latin America and the Caribbean (ECLAC). (26th March, 2020)
LAC’s economic stability is highly dependent on global economic activity, particularly in the US, China and Europe, which are experiencing a drop in their economic activity that is hurting export volumes and prices in Latin America and the Caribbean, especially for commodities. ECLAC estimates that this year, the value of the region’s exports could fall by nearly 15%, with an 8.8% drop in prices and a 6% decline in volume, due to a sharp contraction in global demand.
The low prices are expected to persist, even for products that had not seen declines previously. In the case of oil, the region’s main export product, the sharp drop in demand (estimated at 30%), was too large to be offset by the latest agreement of the Organization of Petroleum Exporting Countries (OPEC). The OPEC members and their allies agreed to cut the oil production by 9.7 million barrels per day, which is only about 10% of the previous supply.
The falling demand caused a decline not only in prices for oil and metals, but also in the agricultural market. Researchers estimate that since the pandemic was declared, the prices of soybean, corn and wheat have fallen by up to 4% and those of beef and chicken have dropped by 6%. Therefore, the greatest impact will be felt by the countries of South America which specialize in the export of commodities, making them more vulnerable to a decline in their prices. In 2020, regional exports to China are expected to fall the most (by 24.4%) which will likely affect the markets for iron ore, copper ore, zinc, aluminium, soybeans, soybean oil, among others.
Furthermore, the region is undergoing a decrease of almost US$ 80 billion (compared to 2019) in capital flows from abroad. According to recent studies, remittance flows to Latin America and the Caribbean could contract by 10%–15% in 2020 and could take 4-8 years to return to the levels seen one year ago. This would lead to an utmost effect on consumption and poverty. For example, in Haiti these flows represented more than 30% of GDP; in El Salvador and Honduras they contributed around 20%. Currently, almost 90% of remittances are used to cover food, health and housing.
Tourism and aviation belong to the worst affected industries and, as they depend on when borders are going to reopen across the world — a question that neither airlines nor governments can currently answer –, the recovery is difficult to predict. As American Airlines CEO Doug Parker said, “the economic fallout from the coronavirus pandemic is far worse for the industry than the crisis airlines faced after 9/11. With the COVID-19 outbreak there’s no indication of when it might end”.
Therefore, the World Tourism Organization estimates global tourist arrivals are expected to fall almost by 30% this year. The UN agency believes this will be a much larger drop than the one caused by the economic crisis of 2008, which was 4%. Unquestionably, the effects of the decline in tourism will be felt the most in particular by micro and small enterprises in the hospitality industry
Moreover, domestic impacts magnify the external effects, as health policies to contain the spread of the virus slow down the production and economic activity. Because there is no treatment nor vaccines for the virus, measures to control the pandemic are focused on restricting mobility. This affects production to different extents, depending on the industry. Consequently, all companies, regardless of their size, are facing: significant falls in revenues, difficulties in obtaining credit and an increased likelihood of insolvency.
As a consequence, the coronavirus will affect the quantity of jobs, increasing unemployment and underemployment, and the quality of work (firms being required to reduce employees’ wages and their access to social protection in order to avoid bankruptcy).
Almost all countries are experiencing severe impacts on people’s working situation and on employment or income, diminishing each nation’s aggregate demand and of course, increasing poverty as well. The International Labour Organization (ILO, 2020) estimates indicate a rise in global unemployment of between 5.3 million and 24.7 million people. As this is happening, the loss of labour income conveys into lower consumption of goods and services, driving many workers into poverty.
The UN acknowledged, in its newspaper, ECLAC’s recent statement regarding that small and medium-sized enterprises provide more than 50% of jobs in formal employment in Latin America and the Caribbean. Given the region’s economic and social inequalities, the strong increase in unemployment rates will disproportionately impact the poor and vulnerable middle-income households. According to ECLAC, this will signify many of the poorest families being forced to send their children into the labour market in order to be able to fulfill daily basic needs to survive. ILO collected data shows that 7.3% of children aged from 5 to 17 years (some 10.5 million children) in the region work.
Evidently, the pandemic has exponentialized the lack of access to education that the region was already facing. This is highly concerning due to the fact that improving the quality and coverage of education is the primary way to reduce inequality. Unfortunately, the current global situation has set off the region’s efforts; according to UNICEF, at this year’s first semester, more than 95% of children in LAC countries were out of school.
To address this disturbing number, LAC countries have introduced different measures. Unfortunately, the region cannot take full advantage of information and communications technologies because most of its population does not have computers nor a proper access to the internet, therefore alternatives such as public TV and radio broadcasting are being used by most of the countries. This way, the digital divide will create an even greater gap between the low and high income population, exacerbating inequalities.
Distressingly, the problem goes further. It is not only the fact that this year will be particularly bad for education in the region because of its population’s lack of economic resources to afford proper internet access and technological devices, but it is the long-term impact that concerns us the most. As previously mentioned, the rise in unemployment has forced many children to join the workforce, a consequence which will linger for several years until the region recovers from the crisis, so there will be a generation of low income kids unable to get an academic education. In other words, this will result in those uneducated kids growing up while remaining in these low-wage jobs that would not allow them to provide their families what’s needed, so their children will be forced to skip school and work, repeating this vicious circle over and over again.
Evidently, Latin America and the Caribbean region faces challenges which will determine the economic prospects of generations to come. The coronavirus pandemic has served not just to harm weak LAC economies, but also to unmask a history of political negligence resulting in underfunded healthcare and education systems, which have thus helped to perpetuate poverty across generations of families of the discussed region. The economic recession induced by the pandemic could further damage LAC citizens, as explained thoroughly, and hence the response of governments will determine how the region is able to bounce back. Whether the imminent consequences of inaction will happen, or a proper economic response can be delivered and propel the region in a collective effort to stride towards a better future.
- Beinhocker, E. (2019, December 04). It’s Time for New Economic Thinking Based on the Best Science Available, Not Ideology. Retrieved July 8, 2020, from https://evonomics.com/time-new-economic-thinking-based-best-science-available-not-ideology/
- Bitar, S., & Zovatto, D. (2020, February 04). The impact of the coronavirus in Latin America´s future. Retrieved July 12, 2020, from https://www.idea.int/news-media/news/impact-coronavirus-latin-america-future
- Cobo, C., Hawkins, R., & Rovner, H. (2020, March 31). How countries across Latin America use technology during COVID19-driven school closures. Retrieved July 12, 2020, from https://blogs.worldbank.org/education/how-countries-across-latin-america-use-technology-during-covid19-driven-school-closures
- ECLAC. (2020). Latin America and the Caribbean and the COVID-19 pandemic Economic and social effects [PDF file]. Retrieved July 2 from https://repositorio.cepal.org/bitstream/handle/11362/45351/6/S2000263_en.pdf
- Economic Commission for Latin America and the Caribbean, ECLAC. (2020, June 17). Report on the economic impact of coronavirus disease (COVID-19) on Latin America and the Caribbean. Retrieved July 12, 2020, from https://www.cepal.org/en/publications/45603-report-economic-impact-coronavirus-disease-covid-19-latin-america-and-caribbean
- Kapur, A. (2020, April 05). Letter: 2020 will go down as the year of deglobalisation. Retrieved July 7, 2020, from https://www.ft.com/content/ecb64b78-737a-11ea-ad98-044200cb277f
- LeBeau, P. (2020, March 20). American Airlines CEO says the coronavirus crisis is worse than 9/11 for the industry. Retrieved July 12, 2020, from https://www.cnbc.com/2020/03/19/american-airlines-ceo-says-the-coronavirus-crisis-is-worse-than-911-for-the-industry.html
- Organization of the Petroleum Exporting Countries, OPEC. (2020, June 30). OPEC Secretary General participates in high-level roundtable on Africa’s energy sector. Retrieved July 12, 2020, from https://www.opec.org/opec_web/en/press_room/6027.htm
- UN News, U. (2020, April 21). COVID-19 to cause biggest economic contraction ever in Latin America & Caribbean. Retrieved July 9, 2020, from https://news.un.org/en/story/2020/04/1062292
- Woodford, K. (2020, May 11). COVID-19 illustrates the difficulties society has in dealing with uncertainties and the stresses this creates. Retrieved July 12, 2020, from https://www.interest.co.nz/opinion/104935/covid-19-illustrates-difficulties-society-has-dealing-uncertainties-and-stresses
*This article was edited by Konstantin Bogatyrev