Under the Latin American Volcano

Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.

Kenneth Rogoff


CAMBRIDGE – The current disconnect between market calm and underlying social tensions is perhaps nowhere more acute than in Latin America. 

The question is how much longer this glaring dissonance can continue.

For now, the region’s economic data keep improving, and debt markets remain eerily unperturbed. 

But seething anger is spilling out into the streets, particularly (but not only) in Colombia. 

And with the rate of new daily COVID-19 cases in Latin America already four times higher than the emerging-market median, even as a third wave of the pandemic sets in, the region’s 650 million people face an unfolding humanitarian disaster.

As political uncertainty rises, capital investment has stalled in a region already beset by low productivity growth. 

Even worse, a generation of Latin America’s children have lost nearly a year and a half of schooling, further undermining hopes of achieving educational catchup with Asia, much less the United States.

For Cuba, Russia, and China, which already have a beachhead in Venezuela, the pandemic presents an opportunity to make further inroads. 

Markets seem relieved that the apparent winner of Peru’s presidential election, Pedro Castillo, a Marxist, appears to have at least a couple of mainstream economic advisers, but it remains to be seen what real influence they will have.

Moreover, Latin American economic data so far this year are good only in the sense that they are not as awful as in 2020, when output fell by 7%. 

In April, the International Monetary Fund forecast that the region’s GDP would grow by 4.6% in 2021; more recent estimates are closer to 6%. 

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 beyond.

Worryingly, much of the region’s real growth this year stems from rising commodity prices fueled by recovery elsewhere, not from genuine productivity improvements that will sustain income through the commodity cycle. 

To make matters worse, low-income households have been hit especially hard by the pandemic and the associated economic downturn.

To understand Latin America’s policy challenges, we need only look at its two largest economies, Brazil and Mexico, which together account for more than half of the region’s output. 

Superficially, they are governed by polar opposites: Brazil by right-wing President Jair Bolsonaro, and Mexico by left-wing President Andrés Manuel López Obrador (widely known as AMLO). 

But the two men are similar in important ways.

While AMLO’s political instincts are rooted in the radical worldview of the 1970s, and Bolsonaro seems nostalgic for Brazil’s era of military rule, both are erratic autocrats. 

Moreover, both remain reasonably popular despite their catastrophic mishandling of the pandemic and a rash of other ill-advised economic decisions. 

AMLO canceled Mexico City’s badly needed new airport project soon after taking office in late 2018, despite the fact that it was well underway. 

And although he campaigned on a promise of rapid economic growth, Mexico’s GDP was shrinking even before the pandemic – by 0.1% in 2019.

Bolsonaro, when he is not threatening to raze the Amazon, has continued to be successful in blaming Brazil’s problems on the left-wing opposition Workers’ Party (PT) that governed the country until 2016. 

Several of the PT’s leaders, including former President Luiz Inácio Lula da Silva, were jailed for corruption.

Nevertheless, it is entirely possible that, in a few years’ time, Brazil will again have a left-wing president – perhaps Lula, whose convictions were overturned in March – while Mexico is back in the hands of a centrist. 

The two countries’ future policy course is thus hard to predict.

Why aren’t debt markets spooked by all this uncertainty? 

In part, it is because both countries have remained fairly conservative in their debt management. 

True, Brazil’s government debt is projected to reach nearly 100% of GDP this year. 

But it is mostly denominated in local currency, and domestic residents hold as much as 90% of the total, up from 80% five years ago. 

Even corporate foreign borrowing has been contained, with the country’s external debt still only around 40% of GDP.

Mexico’s public debt is lower than Brazil’s, at 60% of GDP. 

For all his radicalism, AMLO has so far been a fiscal conservative, much as Lula was in Brazil. 

The lesson that debt crises can derail a populist revolution has been well learned.

True, governments across the region have mounted a surprisingly robust macroeconomic response to the pandemic. 

But they have far less scope than the US to continue using deficit finance. 

To raise spending and tackle inequality on a sustainable basis, Latin American countries must also find a way to increase budget revenues.

Ironically, the protests in Colombia began not in response to benefit cuts, but because the government tried to raise taxes on the middle class to provide more and better pandemic relief to the country’s poorest citizens. 

Governments seeking to redistribute income need to raise taxes on better-off citizens rather than temporarily paper over problems with additional debt.

In recent decades, the US has been reluctant to become deeply engaged in resolving Latin America’s problems, but perhaps this will change. 

For starters, the region needs massive vaccine assistance in order to get back on its feet. 

America can also help by strengthening trade – especially by addressing pandemic-induced bottlenecks and removing lingering Trump-era protectionist measures.

Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. 

But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.

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