parrado2_ ORLANDO SIERRAAFP via Getty Images_informal economy ORLANDO SIERRA/AFP via Getty Images

Ending Latin America’s Economic Malaise

After the 2008 global financial crisis, Latin American and Caribbean governments used booming commodity prices to raise living standards while avoiding the reforms that were needed to lock in long-term growth. Now that the pandemic has revealed the costs of this approach, it must not be repeated.

WASHINGTON, DC – Latin America and the Caribbean need a hard reset. With less than one-tenth of the world’s population, the region has accounted for more than one-quarter of total COVID-19 deaths. The pandemic continues to rage almost unabated in Brazil, Paraguay, Chile, Argentina, and elsewhere. Worse, owing to its large informal sectors, weak health systems, and fiscal restrictions, the region’s economy has been hit harder than any other, declining by 7% last year – the largest contraction since 1821.

Although there will be a modest recovery in the coming months, it will be several years before Latin America and the Caribbean recover the economic ground lost to the pandemic. If everything goes right – meaning the pandemic is brought under control and the world economy does well – the region’s growth could hit 5.2% this year. But if things don’t improve, growth could be under 1%, with a possible recession in 2022. Avoiding that scenario will require bold, timely fiscal reforms.

Latin America’s economic troubles long predate the pandemic. Among other pre-existing conditions, the region’s productivity has for decades lagged behind more successful economies. And the 2008 global financial crisis brought it to a crossroads. At the time, its major economies had the fiscal space to weather the financial crisis and enact reforms to secure long-term growth. But reform was put on the back burner when commodity prices soared. Millions were lifted out of poverty, and governments raised spending on wages and subsidies, which, unlike capital investments in infrastructure, are hard to roll back.