Kenneth Rogoff is a former chief economist at the International Monetary Fund and professor of economics and public policy at Harvard University.
Nowhere is the current mismatch between market calm and underlying social tensions more acute than in Latin America. The question is how long this blatant dissonance can last.
For now, the region’s economic data continues to improve and debt markets remain strangely unfazed. But a seething anger is pouring into the streets, especially (but not only) in Colombia. And with the rate of new daily COVID-19 cases in Latin America already four times the median for emerging markets, even as a third wave of the pandemic sets in, the region’s 650 million people face to an ongoing humanitarian disaster.
As political uncertainty grows, capital investment has stalled in a region already plagued by low productivity growth. Worse yet, a generation of Latin American children has lost nearly a year and a half of schooling, further undermining hopes of catching up with Asia, let alone the United States.
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Moreover, Latin America’s economic data so far this year is only good in the sense that it is not as bad as it was in 2020, when production fell by 7%. In April, the International Monetary Fund forecast that the region’s GDP would increase by 4.6% in 2021; the most recent estimates are closer to 6 percent. But in per capita terms – now understood as a better way to measure recovery from deep economic crises – most Latin American economies will not return to pre-pandemic levels until well into 2022, or later. of the.
Worryingly, much of the region’s real growth this year has come from rising commodity prices fueled by the recovery elsewhere, and not real productivity improvements that will support incomes throughout the year. commodity cycle. To make matters worse, low-income households have been hit particularly hard by the pandemic and the associated economic downturn.
To understand Latin America’s political challenges, one need only look at its two largest economies, Brazil and Mexico, which together account for more than half of the region’s output.
While the political instincts of left-wing Mexican President AndrÃ©s Manuel LÃ³pez Obrador (better known as AMLO) are rooted in the radical worldview of the 1970s, and right-wing Brazilian President Jair Bolsonaro seems nostalgic for it era of military rule in Brazil, the two are erratic. autocrats who remain reasonably popular despite their catastrophic mismanagement of the pandemic and a series of other ill-advised economic decisions. Nonetheless, it’s entirely possible that in a few years Brazil will again have a left-wing president – possibly former president Luiz InÃ¡cio Lula da Silva, who was jailed for corruption but whose convictions were overturned. in March – with Mexico potentially ready to elect a centrist. The future direction of the policies of the two countries is therefore difficult to predict.
Yet the debt markets have not been scared off by all this uncertainty. This is partly due to the fact that both countries have remained fairly conservative in their debt management. To be sure, Brazil’s public debt is expected to reach nearly 100 percent of GDP this year. But it’s mostly denominated in local currency, and domestic residents own up to 90 percent of the total, up from 80 percent five years ago. Even foreign corporate borrowing has been contained, with the country’s external debt still only about 40 percent of GDP.
Mexico’s public debt is lower than that of Brazil, at 60 percent of GDP. Despite all his radical rhetoric, AMLO has so far been a fiscal conservative in his actions, just as Lula was in Brazil. The lesson that debt crises can derail a populist revolution has been well learned.
To be sure, governments in the region have put in place a surprisingly robust macroeconomic response to the pandemic. But they have much less leeway than the United States to continue using deficit financing. To increase spending and tackle inequality sustainably, Latin American countries must also find a way to increase fiscal revenues. Ironically, the protests in Colombia did not start in response to benefit cuts, but because the government tried to raise taxes on the middle class to provide greater and better pandemic relief to the most affluent citizens. poor people of the country.
Over the past decades, the United States has been reluctant to engage deeply in solving Latin America’s problems, but that may change. For starters, the region needs massive immunization assistance to get back on its feet. America can also help by strengthening trade.
Much of Latin America is still a far cry from the horrendous conditions prevailing in Venezuela, where production has fallen 75% since 2013. But, given the ongoing humanitarian catastrophe in that country and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.
Copyright: Project Syndicate, 2020. www.project-syndicate.org
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