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A man rides a motorcycle in the Paraisopolis slum in Sao Paulo, Brazil. Brazil’s government debt is projected to reach nearly 100 per cent of GDP this year. But it is mostly denominated in local currency, and domestic residents hold as much as 90 per cent of the total, up from 80 per cent five years ago.Victor R. Caivano/The Associated Press

Kenneth Rogoff is a former chief economist of the International Monetary Fund and a professor of economics and public policy at Harvard University.

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.

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

While the political instincts of Mexico’s left-wing President Andrés Manuel López Obrador (widely known as AMLO) are rooted in the radical worldview of the 1970s, and Brazil’s right-wing President Jair Bolsonaro seems nostalgic for Brazil’s era of military rule, both are erratic autocrats who remain reasonably popular despite their catastrophic mishandling of the pandemic and a rash of other ill-advised economic decisions. Nevertheless, it is entirely possible that, in a few years’ time, Brazil will again have a left-wing president – perhaps former President Luiz Inácio Lula da Silva, who was jailed for corruption but whose convictions were overturned in March – with Mexico potentially set to elect a centrist. The two countries’ future policy course is thus hard to predict.

Yet the debt markets have not been spooked by all this uncertainty. In part, that’s because both countries have remained fairly conservative in their debt management. True, Brazil’s government debt is projected to reach nearly 100 per cent of GDP this year. But it is mostly denominated in local currency, and domestic residents hold as much as 90 per cent of the total, up from 80 per cent five years ago. Even corporate foreign borrowing has been contained, with the country’s external debt still only around 40 per cent of GDP.

Mexico’s public debt is lower than Brazil’s, at 60 per cent of GDP. For all his radical rhetoric, AMLO has so far been a fiscal conservative in his actions, 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 U.S. 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.

In recent decades, the U.S. 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.

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

Copyright: Project Syndicate, 2020.

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