By Ignacio Munyo
Americas News, Montevideo, Uruguay, Tue 16 November 2021: Latin America has been the region most affected by the COVID-19 pandemic, suffering both the most stringent lockdown measures and the deepest contraction in economic activity in 2020. However, the recent revision of Growth forecast indicates that 2021 will be better than expected.
This performance is driven by a favorable context of external factors affecting fluctuations in the domestic economic cycle. This is particularly relevant for South America, a region that benefits greatly from high commodity prices and low global interest rates.
On the one hand, the region is characterized by a productive structure based on natural resources. About 30 percent of its exports are food-related products, 20 percent metals, and 10 percent mineral fuels and oils.
On the other hand, not only has South America struggled to generate savings, but the region has struggled to channel them into capital spending. Gross savings represent 17% of GDP in South America, compared to 23% in high-income countries. As a result, economic activity has become heavily dependent on the development of international interest rates, which affect foreign direct investment, financial investments and loans, and the financing of public debt. In fact, South America has the highest correlation between economic activity and global interest rates and commodity prices among any emerging region in the world.
In a recent report from the ATLAS Center for Latin America and CERES, we developed an Index of External Factors that measures the headwinds South American economies are currently facing. Based on its historical performance, the current levels of our index suggest that the economies of South America are facing favorable external conditions. The highest value of the index was recorded in 2004 and the lowest in 1999. Regarding the stages of the business cycle in South America, booms (1991-97 and 2004-14) and recessions ( 1998-2003 and 2015-19) are in accordance with the stages described in favorable and unfavorable external contexts, respectively.
Yet South America faces historic barriers to development, which are central to the current automation process. To support long-term growth, the region needs structural reforms to improve human capital, including improvements in educational performance.
Not only was South America already suffering from an academic delay, but the situation was also worsened by COVID-19, with the most stringent school closures, both in terms of measures and deadlines. According to the OECD PISA 2018 test, the region has the highest proportion of pupils with insufficient levels (43%) in the three areas tested (reading, mathematics and science). Oxford University’s lockdown severity index, meanwhile, shows countries in the region have responded to the pandemic with the most stringent school closure measures.
Taking into account the 365 days since the start of the pandemic in each country, schools in South America were closed for an average of 268 days, or 73% of the time considered. As for other regions of the world, their school was closed for 30 to 52% of this first year devoted to the COVID-19 pandemic.
In a region characterized by social unrest, the deferred agenda of educational reform must be carefully managed to maintain social peace. In 2019, several violent street protests took place: Guatemala in January; Brazil and El Salvador in May; Costa Rica, Honduras and the Dominican Republic in June; Paraguay in July; Mexico in August; Argentina and Peru in September; Chile and Ecuador in October; Colombia and Panama in November, and all year round in Nicaragua. The growing social unrest expressed during the 2019 wave of protest – forced to sleep during lockdown – reappeared in late 2020, driven by the economic and health effects of COVID-19.
Therefore, the necessary educational reforms are very difficult to implement. Not only do they go hand in hand with a deeper ideological discussion, but they also affect the private interests of the status quo.
The volatility of the electoral calendar only makes reform more difficult. Data shows that there is a strong negative correlation between the number of deaths caused by COVID-19, the stringency of mobility measures and voting for the ruling party. On average, in elections that marked a shift for the opposition, the average daily number of deaths (until the election) was more than three times higher than in governments where the ruling party remained in power. rigorous mobility measures In addition, countries whose government has implemented strong mobility restrictions have seen populations penalize the government by voting.
For the future, the external factors are on the side of South America. Short-term growth is now positively influenced by historically low global interest rates and international food and metal prices.
However, local decision makers cannot be complacent. Across the LAC region, structural reforms are needed. The quality of human capital must be strengthened. Education must improve.
LAC policymakers need to think long term and act on it. Short-term economic factors are fleeting, but educational reform lasts decades.
EDITOR’S NOTE: Ignacio Munyo is Executive Director of CERES (Uruguay) and Professor of Economics at IEEM Business School, University of Montevideo, Uruguay.