Agreed-upon Reforms to Meet Development Challenges in Latin America and the Caribbean

Latin America and the Caribbean (LAC) is the region hit hardest by the COVID-19 pandemic, and the socio-economic advances of recent decades are at risk of being reversed by the crisis. Recovery strategies must include well-sequenced reforms that promote universal social protection systems, accelerate the formalization of economies, improve fiscal progressiveness, and deepen regional integration, says the Latin American Economic Outlook (LEO) 2021: Moving together towards a better recovery.

According to this fourteenth edition of the report, LAC experienced a historic economic slowdown in 2020. The region’s gross domestic product (GDP) contracted by around 7%. Despite a 6% uptick in 2021, its GDP per capita is not expected to return to pre-crisis levels before 2023–24. The impact of the crisis has been asymmetrical, affecting particularly the most vulnerable groups. As a result, poverty and extreme poverty levels are at their highest point in the last 20 and 12 years, respectively.

While the report acknowledges the considerable efforts made by countries in the region to protect the most vulnerable groups, including women, youth and the elderly, during the pandemic, it also highlights that close to 40% of workers had no social protection when the crisis began. This is largely because on average more than 50% of workers in the region work informally. Moving towards universal social protection systems is critical to protecting those most in need in the post-pandemic context.

According to the LEO, a strong and inclusive recovery requires greater productive integration in strategic sectors, including automotive, pharmaceuticals, renewable energy, the circular economy and sustainable agriculture. It also calls for an urgent holistic fiscal response: greater progressiveness in the tax system: better compliance, more efficient administration and the elimination of inefficient expenditures. Reducing tax evasion and avoidance, as well as eliminating some tax expenditures that account for about 4% of GDP, could increase revenues and equality, without compromising economic recovery.

The LEO 2021 highlights that only 38% of citizens trusted their governments in 2020, compared to 45% in 2010. Social unrest remains one of the main concerns, as evidenced by protests in some countries in the region. Satisfaction with public services, including education and health, also declined markedly during the pandemic. In the case of education, this rate fell from 66% in 2019 to 53% in 2020. In response, the report explores policy actions to rethink the social contract in the region, suggesting four principles to guide a process to bring about a broad consensus: Reconcile the interests of all parties; Contextualize to adapt to circumstances; Compensate those most affected by the reforms, and; Communicate their impact accurately.

The publication also highlights the role of international cooperation in facilitating progress towards these new development models and a new social contract in the region. National responses to the health and socio-economic consequences of the crisis must be supported by renewed partnerships for recovery that place sustainability, resilience and well-being at their center. The design of international debt management, paying particular attention to each country’s characteristics (in particular the challenges faced by small island developing States in the Caribbean), is essential for a successful recovery.

The LEO was jointly prepared by the Organization for Economic Co-operation and Development (OECD) Development Center, the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), CAF—development bank of Latin America—, and the European Commission.