Will politics hinder Latin America's post-pandemic recovery?

The LatAm Outlook from Canning House explores the political and economic trends shaping the region as it bounces back from Covid-19…

After suffering some of the world’s highest death rates and worst recessions, Latin America has started to look forward to a post-pandemic era with greater confidence. Steady progress on vaccination in the region’s larger and wealthier countries, coupled with a rise in natural immunity as a result of widespread infection, have brought case rates down. Economies have bounded back during 2021 amid very favourable external conditions and borders have started to reopen.

However, as the region returns to normality, familiar demons are re-emerging. Forecasts for 2022-23 suggest Latin America risks lapsing back into sluggish growth rates as a result of long-standing structural problems: weaknesses in infrastructure, economic competitiveness and education, high levels of social discontent, rising inflation and heavy pressure on strained public finances. Despite wide variations in government policy across the region, with some leaders imposing long and strict lockdowns (Argentina, Colombia and Peru among them) and others giving greater priority to keeping the economy open (Mexico and Brazil), mortality levels from COVID-19 did not vary greatly among the region’s larger countries; all were high by global standards.

This was probably a reflection of difficulties Latin American governments faced in enforcing strict measures in economies with high levels of informal labour, coupled with inadequate public health systems and high levels of urbanisation. The economic and social costs of the pandemic were borne mainly by the poorest and most disadvantaged, who were unable to work from home or educate their children online, and fuelled calls for better public services, more government spending and efforts to reduce inequality which will not go away as the health challenge recedes. Incumbent presidents face serious challenges as the region enters a major election cycle and the rising popular discontent favours candidates from the political fringe or outsiders.

Ballot box

Politics in the region is polarising more than ever, with centre ground candidates struggling to break through in opinion polls. Politicians previously confined to the fringes are finding more fertile ground for their ideas. In a region with a long history of populism, this outsider phenomenon is raising the spectre of a new generation of leaders or members of congress being elected with little prior experience, espousing radical ideas but lacking the broad support or the credentials needed to govern effectively.

Peru’s president Pedro Castillo is an early example, while it remains to be seen how Colombia's first left-wing leader, Gustavo Petro, will fare. The struggles of Ecuador’s moderate centre-right president Guillermo Lasso with a hostile congress from the outset of his presidency show the difficulties more pragmatic leaders face. With Brazil set to elect a new president and congresses over the next year, there is potential for dramatic shifts in the political landscape of Latin America.

Incumbent presidents face serious challenges as the region enters a major election cycle and the rising popular discontent favours candidates from the political fringe or outsiders...

The new political tides flowing across the region draw strength from historically under-represented or marginalised groups – indigenous people, the urban poor, rural dwellers and black populations – and are not sympathetic to the model of growth and development pursued by the region over the past three decades. The first decade of the century saw the profits from the commodity boom spent on social programmes by the “Pink Tide” of left-wing governments who dominated the region. These helped to lift millions temporarily out of poverty, but did much less to address underlying structural weaknesses. When raw materials prices fell, governments tightened their belts and spending fell back. Inadequate investment in education, health and infrastructure limited the region’s growth prospects, further fuelling discontent. As a result, many of the less well-off now share a conviction that the whole growth model was flawed and formed part of a rigged system designed mainly to benefit the elite.

Countries with private pension systems, such as Colombia, Chile and Peru are seeing these questioned by politicians who want to expand state provision or curb the role of the private sector. The same is true for health and for university education. The role of independent central banks with inflation-targeting mandates is likely to come under greater scrutiny as inflation takes off in the region and interest rates rise, hurting the recovery.

Attracting investment

The challenge for the region is whether it can accommodate demands for greater social spending, channel this productively for the long-term benefit of society, for example by spending efficiently on health and education, and at the same time maintain business competitiveness by keeping taxation levels reasonable and guaranteeing economic stability. The policymakers’ slogan “Build Back Better” has been heard often at conferences on the region as thoughts turn to the post-pandemic era. It encapsulates the aspiration that Latin America should invest in productive infrastructure, renewable energy, health and education after the pandemic to promote an inclusive and green recovery which will position the region to compete in global markets and ensure sustainable growth.

The merits of such an argument are obvious. Yet translating this aspiration into reality means overcoming serious hurdles and changing long-ingrained habits. The most obvious problem is how to fund such an effort. Investment on the scale required to achieve meaningful results would have to come from outside; governments in the region are too stretched by the costs of the pandemic to finance big new programmes from their own resources and external credit conditions are likely to grow more difficult in 2022/23.

Latin America should invest in productive infrastructure, renewable energy, health and education after the pandemic to promote an inclusive and green recovery which will position the region to compete in global markets and ensure sustainable growth.

Some resources may become available if the Inter-American Development Bank, the region’s main infrastructure financing vehicle, succeeds in securing a big capital increase but this is not guaranteed. Otherwise, the multilateral development banks have already lent extensively during the pandemic and currently lack the firepower to embark on a major new lending round.

This will not be easy to achieve in a region where higher public spending has not always led to better outcomes in health and education or to lasting improvements in transport or public services but has instead sometimes been misdirected towards “welfare” payments aimed at securing votes or lost to corruption. An improvement in government effectiveness is vital to ensure the social progress the region needs. It is also worth noting that similar calls for investment to promote sustainable growth were heard in the region more than a decade ago but went unheeded. The region’s short electoral cycles and propensity for big swings in policy upon changes in government make long-term investment and effective planning a difficult proposition.

A further obstacle to the green agenda is the unwillingness of the three biggest economies to make a decisive shift away from fossil fuel production. Indeed, Mexico, Brazil and Argentina are all seeking significant investment to increase output of fossil fuels, and Mexico is curbing private investment in renewables. Latin America will need to compete globally for funds on debt markets with other emerging regions, most notably Asia, at a time when capital is likely to become scarcer and more expensive. Countries which pursue investor-friendly policies will clearly have a better chance, yet the political dynamics mentioned earlier may work against this.