Between policy and politics in Latin America and the Caribbean

The COVID-19 outbreak is unfolding in Latin America and the Caribbean. Despite concerns of underreporting and insufficient testing for contagion, the virus has rapidly spread throughout the region. While overall mortality per 100,000 population remains below that of developed countries1, prospects of survival after contracting COVID-19 are concerning. Fatality in confirmed cases in several countries is higher than in the United States and not so distant from those of Italy or Spain. COVID-19 has only added to the ongoing fight against outbreaks of measles and dengue in the region.

Short-term policy priorities aim at containing societal and economic impacts by focusing on slowing down the contagion while managing the extraordinary demands on the healthcare system. Decisive action is required on several fronts simultaneously, otherwise the fight against the virus and subsequent recovery risk major setbacks, nurturing what López-Calva identifies as a “self-reinforcing cycle between coronavirus and inequality.”2

Economic impacts of the pandemic are visible

Despite differences in individual performances, the loss of economic activity for 2020 in the region ranges from a conservative -1.8 per cent to -4.0 per cent or lower, one of the worst records since World War II.3

COVID-19 is exacerbating the financial turmoil the region has experienced even before the outbreak. Disruptions on the real side of the economy follow closely. According to Economic Commission for Latin America and Caribbean (CEPAL), the global downturn arising from COVID-19 is likely to affect the region through four major channels. First, a significant loss in economic dynamism of its main trade partners, namely China, the United States and Europe; second, plummeting commodity prices; third, a significant drop in demand for tourism and transport services; and fourth, disruptions in global industrial activity and the functioning of global value chains.4

In the interest of space, let us focus on the issue of industry in particular.5 The emerging evidence indicates heterogeneity of disruption across industries and firms. In Argentina, for example, activities linked to leisure and sports or furniture, footwear and related industries shut down almost immediately following the adoption of preventive measures against COVID-19. By contrast, food processing, the production of basic healthcare products and related activities — packaging, logistics, and laboratories for food safety — continue operating, together with activities related to energy (oil extraction) and telecommunications.

In the Dominican Republic, industrial free zones, the country’s strongest export sector (accounting for around 3.2 per cent of GDP in 2019) reduced operations to around 10 per cent, although the manufacturing of medical devices continues. Domestic manufacturing, on the other hand, which accounts for 10 per cent of GDP, could be among the least impacted industries as its operating levels remain above 50 per cent. The halt in construction activities is also affecting non-metallic mining and quarrying activities (which account to around 1.8 per cent of GDP).

In Mexico, the world’s fourth largest car manufacturer, the automotive industry constitutes the most important source of foreign currency and is spearheading efforts in industrial modernization. The COVID-19 outbreak has halted assembly plant operations even though car manufacturers were already experiencing a downward trend in their business cycle, necessitating a partial suspension of operations, wage cuts, early retirement schemes, compulsory vacation and other job-saving measures. A different configuration of the automotive industry may emerge after COVID-19, with the global economic downturn delaying recovery in demand for automobiles.6

How to protect the economy and foster recovery in a rapidly evolving environment?

Fiscal policy should continue to be a priority with sufficient backing of resources to maximize impact. Economic emergency plans are in place throughout the region, however, their implementation and effectiveness remain subject to debate. In addition to limited fiscal space, perceived slow responsiveness, particularly in some of the largest economies including Brazil and Mexico, have delayed responses to COVID-19. Several Caribbean countries have yet to formulate precise policy responses, but fiscal stimuli are in place, including a reallocation of existing budgetary resources.7

Moving forward, governments in the region could consider the following set of actions in order to mitigate the risks stemming from the pandemic:

First, avoiding the false dichotomy between protecting people or the economy. Informality, inequality and poverty make measures to contain the virus even more problematic. Countries such as Bolivia, Chile and Ecuador have imposed severe fines and have even ordered public security forces to ensure compliance with social distancing and lockdown measures. Brazil, Nicaragua and Mexico have been slower, openly reluctant, or have only loosely adopted responses to COVID-19. Many livelihoods depend on the informal economy or on formal economic activities that provide daily wages. Sustaining and even extending direct cash transfers, expanding healthcare capacities and food distribution programmes such as those introduced in Bolivia, Brazil, the Dominican Republic, Mexico and Peru help ease the burden on the poor.

Second, this should not pre-empt measures to salvage the economy and maximize firm survival and employment. Support to liquidity and debt restructuring, deferral of payments on utility bills, sharing the wage bill and easing people’s and firms’ fiscal burden should contain negative impacts, particularly on the strong base of small- and medium-sized enterprises (SMEs), which operate often in informal markets and often cannot afford to halt their operations, even for short-term periods. Similar measures should help formal firms weather the immediate shocks and buy them time to undertake necessary organizational transformations. Otherwise, the resulting rise in unemployment and the loss in personal and corporate incomes could exacerbate poverty and hinder future productive investments. Whether intended to protect people or firms, the COVID-19 emergency support measures should be evaluated once the crisis ends in order to avoid the issues of capture, free riding and a mere return to the previous status quo.

Third, demand-driven policies, such as strategic public procurement, could help fight COVID-19 and reignite an inclusive and sustainable economic recovery. Several countries in the region have introduced regulatory flexibility to allow direct contracts and incentivize firms to repurpose production or to foster domestic manufacturing of basic health supplies. Similar initiatives would contribute to sustainable and equitable recovery, drawing from experiences in the region. For example, the joint procurement of essential medicines in Central America, regulatory reforms to foster the reorganization of markets for generic products in Brazil and Mexico, or the purchase of products from women-led businesses in the Dominican Republic.8

Fourth, mobilize national statistics offices to inform and monitor interventions during and post-COVID-19. CEPAL asserts that uncertainty is forcing governments to experiment and learn as they fight COVID-19.9 Learning should follow a minimum structure and account for the differentiated need for policy support across industries and firms. Manufacturers of products of immediate relevance to the fight against COVID-19 — medical instruments and supplies, pharmaceuticals and other industries — are struggling to cope with a sudden surge in demand and may capitalize on the outbreak. The situation will differ for other firms, depending on where the firms were in the business cycle before the outbreak of COVID-19, the severity of the short-term disruption of their activities and their prospects for recovery. Governments with limited planning capacities should explore partnerships with academic and private entities to produce such monitoring instruments and design policy interventions.

Fifth, strategically mobilize domestic scientific and technological capabilities to supplement health and productive capabilities. In Argentina, the Ministry of Science and Technology (MINCYT) and the Consejo Nacional de Investigaciones Científicas y Técnicas (CONICET) have created a special research unit, COVID-19 MINCYT-CONICET, to develop diagnostics and provide epidemiological and prospective advice. In Brazil, Finep-Fapesp, EMBRAPII, the Ministry of Health and other entities are pursuing similar goals, while in Uruguay, Universidad de la República, the National Agency for Research and Innovation (ANII) and the Ministries of Public Health and of Industry, Energy and Mining, respectively, are supporting diverse initiatives to mobilize local research to fight COVID-19. Argentina, Brazil, Mexico, Uruguay and other countries in the region have issued calls for research proposals directly relevant to fighting COVID-19. Initiatives at the regional scale should be explored, even building on open science initiatives such as ProCiencia in Mexico.

Lastly, there is an urgent need for strengthened leadership, coordination and decision-making power within the countries and across the region. Policymaking in times of crisis may compromise political capital since many of the necessary interventions can be perceived as harsh and unpopular. Heads of state can either lead the response or become a liability. To fight the COVID-19 pandemic, the region requires stronger political consensuses, decisive all-of-government approaches and multi-stakeholder participation. Policy effectiveness is diluted in absence of consensus and coordination between federal and regional governments, be it due to divergent perceptions of the severity of the COVID-19-related crises or the urgency of implementing measures to protect the health of both people and the economy. Governments should commit to developing truly collaborative mechanisms that allow public and private partners to explore joint policy responses according to short-term needs, and longer-term recovery strategies involving programmes for both enterprises and employees. This would require strengthened decision-making and implementation powers of existing high-level commissions, consultative bodies or task forces responsible for coordinating efforts against COVID-19.

Stronger together?

The fight against COVID-19 underscores asymmetric global power relationships between countries as well as between countries and transnational corporations. Governments across the world are introducing partial or total bans on trade of COVID-19-related supplies, or are invoking special powers to lure companies into repurposing production and into increasing local supply. While multinational firms based in developing countries may benefit from such a surge in demand, many would end up contributing little to the fight against the outbreak in host countries. In Mexico, this situation has led a provincial government to close the operations of a ventilator manufacturer whose priority was export to the United States.10 Cuban healthcare services are providing relief to countries in the region11, but the countries in the region need to do more to strengthen inter-regional collaboration as a means of securing crucial resources to fight COVID-19 and facilitate an orderly recovery afterwards.

Focus on building resilience in the medium to long term

In the future, extreme events such as COVID-19 will continue to penalize the unprepared. Governments in the region need to address long overdue investments in health, innovation and productive capabilities that can contribute to the strengthening of social and economic resilience. UNIDO data on manufacturing value addition and industrial competitiveness document that manufacturing in Latin America is receding relative to other developing countries — mainly in Asia — increasing the risk of over reliance on single sources for critical medical supplies, among others.12 While market shocks can drive innovation, firms and countries need to invest in the required technological and productive capabilities. COVID-19 represents even bigger challenges for a region characterized by chronic underinvestment in science, technology and innovation, and structural gaps in research and industry collaboration. The pandemic is also challenging democratic governance and offers an opportunity for developing novel multi-stakeholder approaches to building consensus, informing policy design and implementation.