From the Washington to the Latin American Consensus

Map of Latin America

The COVID-19 crisis has dramatically affected Latin America. The region has become over the past few months the epicenter of the pandemic, and it will experience a contraction in economic activity of 9.1 percent according to the U.N. Economic Commission for Latin America and the Caribbean (ECLAC) or 9.4 percent according to the International Monetary Fund.

It is not only the worst regional recession in its history, but also the worst in the world after Western Europe. As a result, in the most pessimistic scenario—which is the most likely now—ECLAC estimates that poverty levels will increase from 30 to 36 percent of the population; that is, it will affect an additional 36 million Latin Americans.

The crisis also happens after what I have referred to as a “lost half decade”: five years of very poor economic performance, during which the region grew by just 0.2 percent annually. This is the worst performance for five years since the end of World War II. Slow growth has been accompanied by political crises in several countries and a weakening of democratic trends, which have been one of the strengths of Latin America since the 1980s.

Slow growth since 2015 also interrupted the poverty reduction and improvements in income distribution that had taken place since 2002-03, one of the best trends that the region had experienced in recent decades, although it still left the region as one with the worst income distributions in the world. Due to the COVID-19 crisis, the lost half decade will become a lost decade, 2015-2024, which may be even worse than the one experienced by the region during the debt crisis of the 1980s.

On top of the adverse previous trends, the current crisis follows three decades of unsatisfactory economic performance: From 1990-2019, Latin America barely grew at 2.7 percent annually, which is half of the 5.5 percent rate achieved in 1950-1980, the period of state-led industrialization.

A fundamental reason for the poor long-term growth has been the premature deindustrialization that the region has experienced, in the sense that it has taken place at lower levels of income per capita than those at which this process started to take place in the developed countries. It has also taken place at very low levels of investment in research and development: only 0.67 percent of GDP, less than one-third the levels of OECD. In both cases, trends are in open contrast with those of East Asia. China, for example, invests in research and development more than 2 percent of GDP, a level quite close to that of OECD.

All of these adverse trends require a deep rethinking of the development model that Latin America has followed since the market reforms that were adopted in the late 1980s or early 1990s in most countries. For this reason, a group of 31 Latin American and Spanish academics and former public officials set out to propose what we call the “Latin American Consensus 2020”, that is, an alternative to the Washington Consensus that served as a framework for the market reforms, the results of which have been clearly unsatisfactory. The new Consensus was published by the Iberoamerican Institute of the University of Salamanca.

It contains 18 recommendations, which I will summarize as five major development objectives.

The first is the emphasis on social development and, especially, on the reduction of inequality, which is Latin America’s major problem. It requires the development of quality education and health, an expansion of social protection systems, the promotion of formal employment, quality labor training, and the fight against gender inequalities.

The second is a major push for productive and export diversification with increasing technological content supported by ambitious industrial policies, one of the areas that became a “no-no” under market reforms (“the best industrial policy is to have no industrial policy,” it was argued). This requires a parallel effort to significantly increase investments in research and development, support for innovative firms, and the construction of better infrastructure, including the technological one, which has become even more important with the COVID-19 crisis. And it must be accompanied by continued progress in the agricultural sector, one of the strengths of Latin America, and strong support for micro, small, and medium-sized firms, which are the great generators of employment.

The third is a strong macroeconomic policy and, in particular, sound public sector finances, which must also be based on progressive tax systems that contribute to improving the region’s income distribution. It also requires stronger countercyclical macroeconomic management, which should reduce the intensity of business cycles that have been very strong in the region since the 1980s. The limited fiscal space has been a strong constraint to manage the current crisis.

The fourth is a firm commitment to international agreements, including the United Nations Sustainable Development Goals, the agendas to combat climate change, and defense of biodiversity. It also implies a stronger push for regional agreements, which requires the depoliticization of current processes, which is a major reason for the periodic crises that regional integration processes have experienced over the past decades.

Last, but not least, we propose the strengthening of public sector institutions, and especially, a firm renewed commitment to democracy, which is essential, in the words of the Consensus, to converge toward a set of shared values ​​and a feeling of citizens that they belong to society.

In the context of previous adverse trends, the COVID-19 crisis requires Latin America to deeply rethink its development model. The Latin American Consensus 2020 is a starting point for this debate.