Latin America’s economies face challenges in 2021
Many of the countries in the region will grow far too slowly next year.
Yesterday’s CAF conference panel on Latin America’s economic situation was excellent. The panelists offered important ideas about solutions to the region’s economic challenges. However, they were perhaps too optimistic in believing their solutions are likely to be implemented.
Based on what I’ve heard in recent economic discussions including the panel at CAF, the current conventional wisdom on Latin America’s economic situation can be summed up as follows:
Before 2020, Latin America faced slow growth and structural inequality that led to angry citizens.
Things are really bad in 2020. Economies are shrinking. The region will see 50 million additional poor, an increase in extreme poverty and three million businesses will shut down.
Latin America needs its political leaders and societies to commit to a significant economic restructuring or they are doomed to face another lost decade.
There is no money for a significant economic restructuring.
Most of the region’s political leaders are not up to the task.
Many of the conversations take these really awful facts and frame them in an optimistic tone. They say something along the lines of:
This is an opportunity for real change in Latin America. The region should negotiate a new social contract and create more inclusive growth that can prevent a decade-long economic disaster.
I agree with that statement. Yet in framing the situation like that, the speakers dodge the pessimistic news:
Many countries in Latin America are likely to fail at fixing their economies. Next year will be worse than expected.
The economic risks in 2021
Above: IMF estimates for 2020 and 2021 as of June 2020
According to forecasts from various institutions, none of the region’s largest countries will grow enough in 2021 to recover what was lost in 2020.
Even with those pessimistic forecasts, there are risks to the downside:
Many of the countries that have committed to fiscal stimulus do not have the funds to continue it through the end of next year.
The region’s banks are likely to see increased debt defaults and bankruptcies from consumers and businesses that can’t pay.
The potential for political unrest grows with prolonged economic pain, and that unrest could worsen the investment environment.
The region is more likely to see bad surprises than good ones. A second wave of the virus, especially if they lead to another set of lockdowns (something I have written is unlikely), would be a significant blow to the region’s economies. The chance that a boom in global growth or commodity prices seems slim in 2021.
Good news: There may be winners
While I’m pessimistic about the region as a whole, it’s possible that there are some economies that do well. The whole region does not have to sink or swim together.
What would signal a country that is likely to do better economically in a region that is hurting?
First, there seems to be a consensus among the economic experts that they are looking for political leadership that finds a way to spend money, particularly spending that directly creates jobs, improves health infrastructure, addresses climate change and gets money into the hands of the poorest and most vulnerable populations. Somehow, that spending needs to occur in spite of fiscal challenges.
Second, successful countries will make progress on improving tax collection and prosecuting corruption. Both of those are necessary for dealing with a tough fiscal situation without austerity.
These potential signals for success also lead to two signals that countries will do poorly.
First, countries that attempt austerity measures that cut government spending will face major economic challenges that could last for years to come.
Second, analysts should be cautious of being overly convinced by political leaders who talk but fail to act. The signals above should be measured on money spent and regulations implemented, not the plans and speeches of leaders. This is not a confidence game that can be won by leaders who sound serious and technocratic but fail to act.
On my mind: Look for counter-intuitive successes and failures
We all have a mental image of the leaders who we think will do well or poorly in a crisis like this. One thought that has been running through my mind is the fact that many of us (me included) may be surprised by the leaders who successfully navigate the coming economic challenges and the ones who fall short.
Some (but not all) of the leaders who are willing to break norms and rules and take bold risks may very well outperform the technocratic policy wonks. I don’t think the left-center-right dynamics of the political spectrum will be helpful in predicting who does best.
In the short term, we’ve already seen this play out with the differences between Brazil and Mexico. Bolsonaro’s willingness to hand out money to the poor has helped to limit the economic damage. Meanwhile AMLO’s austerity has led to one of the poorest economic performances of the region. The president handing out money is not the one most of us would have predicted in 2019.
On this issue, I also think back to Argentina, which overshot analysts’ estimates and grew over 7% for five straight years in the 2000’s in spite of analyst warnings that it would crash. Eventually, the fiscal challenges hit hard, but that doesn’t negate how the country over-performed immediately following a financial crisis.
I’m not ready to predict that Bolsonaro or any other leader will be successful in creating economic gains next year. But I am going to admit high levels of uncertainty in terms of who will do well and who will do poorly. I’ll be monitoring the signals I listed above rather than guessing based on my perception of how serious the leaders appear.
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