Covid-19 and the Failure of Economic Globalization in Latin America: Is there a way forward?

Globalization has failed Latin America. It created the vulnerability that is making it so difficult for the countries of the region to address the developing social tragedy brought about by the pandemic. A recent OECD report suggests that the way forward is for countries to negotiate a “new social contract”—one that involves a revamping of institutions and social priorities.

Most Countries have never had Inclusive Social Contracts

This recommendation ignores the unfortunate realities of Latin American history: the fact that most countries, with a few exceptions, never had a “social contract” that involved compromises on the part of the upper middle classes and the wealthy to pay taxes to support the health and welfare of the majority of the population. While by 1970 nearly 70 percent of workers in Chile, Argentina, and Uruguay, had social security protection (health coverage and pensions), for most of the countries, coverage was less than 50 percent. Further, the political settlements of mid- twentieth century Latin America depended not on concessions from propertied classes but on high commodity prices from which populist governments extracted resources for social improvements.

With the debt crisis of the early 1980s, the proportions of the economically active population covered by social security declined as formal sector employment dropped and unemployed workers moved into informal employment. As is widely documented in the scholarly literature, despite the fact that Latin American countries were electoral democracies during this period, market liberalizing reforms, policies that were deemed essential to the region’s economic recovery at the time, were negotiated in secret in Washington by small groups of domestic and international technocrats and usually imposed in an authoritarian way, frequently through presidential decrees. The economic crisis and market liberalizing policies resulted in a sharp rise in poverty. Less well documented, particularly in the English language scholarly literature, was the widespread popular resistance to these market liberalizing reforms. Protests against the abolition of subsidies on basics necessities and the privatization of public enterprises in strategic natural resource sectors, were particularly intense. Governments abandoned even the limited “social contracts” of the 1950s to 1970s once the economic crisis of the early 1980s hit.

Economic Globalization and the Creation of Extreme Economic Vulnerability

Given that the market model assumed the efficacy of comparative advantage, countries’ industrial support systems—tariff and quota protection, requirements for technology transfer and the use of domestically produced inputs--were all abandoned. According to the conventional wisdom of the day, the inefficiencies of Latin American industry meant governments must end supportive measures, a policy direction that generated processes of de-industrialization. The industrial expansion that did occur now involved incorporation into global value chains at the low-paid, low technological end. This was particularly the case for Mexico and Central America where market policy reforms combined with various types of tax advantages, encouraged an influx of foreign firms into export processing zones. For most countries, however, the dismantling of domestic industry, especially when combined with a rise in commodity prices beginning in the early 2000s, resulted in a marked increase in export commodity dependence. By 2012, over 90 percent of the exports of Bolivia, Ecuador, and Venezuela were natural resources, while over 60 percent of the value of exports from Brazil, Chile, Argentina, Colombia, Paraguay, Peru, and Uruguay were some combination of fuel, minerals, and agricultural products. Increased demand for commodities on the part of China, was instrumental in stimulating increased production and export commodity dependence.

Hence, the region’s economic decline, initiated with the decline in commodity prices beginning 2011/2013, has accelerated with the pandemic as demand for the region’s major exports dwindled further. As exports declined, growth slowed and government revenues fell, triggering a tightening in expenditures and rises in unemployment. Social protest was widespread in 2019. The pandemic has also disrupted global value chains, as economic growth in the U.S. has dropped. Covid-19 has decimated the region’s tourist industry. Rising unemployment in the U.S. has resulted in a decrease in remittance payments, sent by migrants who cannot find employment in their home countries, further contributing to the rise in poverty.

The Boom Years: Poverty Reduction but the Failure to create Decent Employment

The way in which Latin American countries became integrated into the global economy, involving as it did increased commodity dependence and the dismantling of industry, failed to produce adequate decent employment. Economic activities such as mining, petroleum extraction, and commercial agricultural production have not been good employment generators. Export processing zones were largely unintegrated with the rest of national economies and so did not stimulate other employment generating economic activities. Even with the high levels of economic growth that occurred during the commodity boom years, a high proposition of the economically active population remained without decent employment and social security protection. This commodity dependence also made countries highly vulnerable.

While commodity prices were high, political leaderships were able to direct a significant amount of the increased revenue into poverty reduction programs, particularly for the extremely poor. However, the regimes of the 2000s that took an active role in promoting poverty reduction, did not orchestrate new “social contracts”—in the sense of agreements to redistribute wealth from the upper middle classes and the wealthy toward the disadvantaged. Rather, they harnessed the revenues generated by commodity export led growth. Even though the upper middle class and the wealthy also benefitted from the commodity boom, they usually opposed left regimes pursing “populist” agendas. Indeed, the market liberalization process had increased the economic power of domestic business interests, which had bought up privatized public companies, invested abroad, and moved into export markets. The right parties that represent these interests have returned to power in an increasing number of cases, most notably in Brazil, Chile, and Bolivia. Where they are not in power, they have enormous political clout.

Challenges to Negotiating a New Social Contract

Given the extent of political polarization in most countries of the region, addressing the needs of the disadvantaged in the context of the current pandemic faces almost insurmountable obstacles. Politically, doing so requires economic growth so that upper middle and wealthy classes are not adversely affected and mount opposition. Even in the medium term, given that economies will remain weak, governments, even if so inclined (and most are not), are not likely to have much success in negotiating an inclusive social contract that involves an equitable distribution of sacrifices. Continued adherence to a market model that supports the notion of comparative advantage restricts Latin American economies to economic activities that will fail to produce sustained growth and adequate decent employment.

The market model in general and the way in which Latin American has become inserted into the global economy, makes it very difficult for countries to address the pandemic and its economic consequences. The conditions for an enduring social contract require a major rethinking of the current political and economic model—towards commitment to an accountable and activist state committed to incorporation into the global economy in a way that stimulates economic growth, reduces vulnerability, and enhances decent employment-- a state committed to the creation of comparative advantage. Aid from the Global North and the multilateral institutions it dominates, in the form of debt relief and loans, will not be effective unless there is a major challenge to the basic assumptions of economic globalization—one that facilitates policy choices that stimulate economic diversification and productive employment.