COVID-19 and Latin America: How Bad Can It Affect the Region?

International crisis of COVID-19 has thousands of people in Latin America asking themselves how to face it and it leads to the question of how bad the Latin American economy will be affected. Many people have lost their jobs internationally and now the question for many in Latin America is the not obvious effects of the pandemic in the economy of the region. The novel Covid-19 was expected to create an economic contraction in Latin America and the Caribbean of -5.3% (ECLAC). The margins of development of the region for this year were already low at 0.4%. Nevertheless, the effects of the pandemic has worsened the current rate of growth, and the predicted -5.3% margin of development is the worst rate of expansion of GDP in Latin American history. For context, the previous recessions in both 1914 and 1930 were -4.9% and 5% respectively (ECLAC). The pandemic has shown external economic damages such as the decrease in the price of commodities and structural problems that the countries of the region are being affected by such as the informal worker market and trade.

The external economic damages caused by the drop in international trade caused the volume of world trade to collapse. The World Trade Organization (WTO) estimates a fall of between 13% and 32% in 2020. Falling commodities prices, less demand from China regarding agricultural products like soybeans, the collapse of the price of oil,  heightened risk aversion, and worse global conditions have contributed to this collapse. The volatility has increased to record levels, translating to massive capital outflows from emerging markets. Most currencies have depreciated against the dollar and there have been sharp increases in sovereign risk not to mention less demand for tourism services. Tourism globally is expected to fall by between 20% and 30% in 2020, a much larger drop than in 2009 of 4% because of the 2008 recession (UNWTO, 2020). Money transfers to Latin America and the Caribbean could contract by 10%–15% in 2020 and could take 4–8 years to return to the levels seen in 2019 (ECLAC).

Tracing it back to Latin American countries' economic development, one can see that they are heavily dependent on exports. The region is hugely susceptible to negative swings on the price of commodities. On average, the low prices are expected to persist, even for products that have not seen declines. For example, in recent weeks, the market prices of agricultural products that had not fallen as much as oil and metals had begun to slide, due to shrinking demand (ECLAC).Soybean, corn, and wheat prices have fallen by up to 4% and futures for the second quarter have started to tumble. Similar patterns can be seen in beef and chicken, with average drops of 6% over the past two months. In the case of oil, the region's main export product, the sharp decline in demand, estimated at 30%, was too large to be offset by the latest agreement of the Organization of Petroleum Exporting Countries (OPEC), which cuts the output of OPEC member countries by 20% (ECLAC).

Regional exports to China are expected to fall the most in 2020 (24.4%) (ECLAC). This is likely to affect mainly products with forwarding linkages in value chains in China (iron ore, copper ore, zinc, aluminum, soybeans, soybean oil, among others). The most exposed countries are Argentina, Brazil, Chile, and Peru. They are the region's largest exporters of such products to China.

Besides that, the pandemic is showing internal structural problems related to the informality of the Latin American work market. Latin America has a significant amount of their population that works in an informal setting. In other words, they don't have to pay taxes, and the majority of these workers are not in any health care system. The problem with the informal workers is that their income is made by their daily activities outside which would be halted due to the pandemic. Even though the majority of countries have imposed severe quarantines, some people can not afford to stay home.

To show a better understanding of the informal market, one can look to Peru. One of the countries with one of the most significant amounts of informal workers in the region. It's estimated that there are at least 5 million informal workers in Peru that earn a monthly income of S/ 930 which is approximately $300 (Gestion). For the people who work as informal workers, mostly in the street, the new policies that adjusted many workers to be able to work from home would not make any improvement in the informal workers' livelihoods. Furthermore, their source of work would be dramatically cut since they can not go to work outside and people are not going outside to purchase things. The majority of informal workers in Peru are concentrated between the ages of 25 to 44, and the number of informal workers has grown by 1.4% since 2018 (Gestion, 2020).

The faith of these workers would be more related to how the current government is dealing, giving incentives to entrepreneurs to leave the informal economy and stay at home. The consequences of having such a vast informal sector are that many people are unable to get the right help economically, or health-wise. Informal workers represent a massive challenge for the Peruvian government. To what extent is it possible for people to just stay at home, and what could be the next steps to Governments to correct this situation, knowing the external and internal problems that the region is facing? Unemployment is most likely to keep increasing not only for informal workers but also for formal workers as well. It’s important that the Governments put in place targeted plans that lead to an effective reactivation of the economy in the following months. Besides that, the death toll in the U.S has already reached 100,000 people, is this a path that Latin America is also condemned to reach while trying to save their economies?

Work Cited: 

Economic Commission for Latin America and the Caribbean. (2020, April 21). Measuring the impact of COVID-19 with a view to reactivation. Retrieved from https://repositorio.cepal.org/bitstream/handle/11362/45477/4/S2000285_en.pdf

Economic Commission for Latin America and the Caribbean. (2020, March 21). COVID-19 Pandemic Will Lead to the Biggest Contraction in Economic Activity in the Region’s History: A -5.3% Drop in 2020. Retrieved from https://www.cepal.org/en/pressreleases/covid-19-pandemic-will-lead-biggest-contraction-economic-activity-regions-history-53

Linares, Nicole. (2019, November). Informalidad laboral en el Perú: la gran problemática y sus posibles soluciones. (n.d.). Publicaciones Económica. Retrieved from http://economica.pe/articulos/1366-informalidad-laboral-peru

Miñán, Whitney. (2020, March). El coronavirus en medio de la informalidad laboral peruana. Gestion. Retrieved from https://gestion.pe/economia/el-coronavirus-en-medio-de-la-informalidad-laboral-peruana-noticia