Building an Inclusive Recovery in Latin America and the Caribbean by Carlos Felipe Jaramillo, Otaviano Canuto and Pepe Zhang – Project Syndicate

The COVID-19 pandemic brought a halt to the expansion of Latin Americas middle class and pushed millions back into poverty. Reversing this pattern requires addressing the regions vulnerability to economic shocks and strengthening countries resilience.

WASHINGTON, DC Global poverty rose last year for the first time since 1998 as the economic fallout of the COVID-19 pandemic pushed an additional 97 million people below the international threshold of $1.90 per day. At first glance, Latin America and the Caribbean (LAC) appears to have fared relatively well: three million newly poor people as a result of the pandemic, compared to 58 million in South Asia. But poverty in LAC demands more attention than the headline statistic suggests.

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The pandemic affected economic growth in LAC more significantly than in any other developing region last year, with GDP contracting by 6.5%. Although the region is expected to rebound strongly with 5.2% growth this year, the effect on the poor could be delayed, owing not only to relative vaccine shortages but also to traditionally slower declines in poverty relative to increases in per capita income. Moreover, those without access to the digital economy could experience additional erosion in future earnings from a looming learning and productivity crisis caused by some of the worlds longest lockdowns and school closures.

Even before the pandemic, most LAC countries were experiencing anemic growth and a slow transition from middle- to high-income status. COVID-19 likely will extend this middle-income trap. In its recently released annual country classifications by income level, the World Bank identified seven economies globally that dropped to a lower income category. Two, Panama and Belize, are in LAC. And countries in the region that remained in the same income category as last year saw greater divergence, rather than convergence, with wealthier economies. Specifically, the average upper-middle-income country in LAC moved 10.4% further away from achieving high-income country status in 2020 than in 2019, compared to the average global divergence of 3.8%.

Digging deeper into the data reveals important nuances and heterogeneity concerning pandemic-induced poverty and vulnerability in LAC, especially in terms of geographic distribution and demographic composition.

Geographically, recent World Bank findings show that Brazils success in mitigating the impact of COVID-19 on the poor in 2020 altered the overall regional picture. Rescue measures lifted a net 14 million people out of poverty in Brazil (measured by the $5.50 per day poverty line used to assess upper- and lower-middle-income countries). But, excluding Brazil, the largest regional economy, LAC recorded a net increase of 13.7 million new poor. Even in Brazil, policymakers must carefully balance the trade-offs between sustaining and withdrawing extraordinary liquidity support.

In terms of demographic composition, COVID-19 put an end to an impressive period of economic growth that, beginning in the early 2000s, expanded the middle class and reduced regional poverty by half. A majority of Latin Americans and Caribbeans were middle class in 2018, but the pandemic has now left the majority vulnerable.

There is a silver lining. Consistent with global trends, much of LACs new poor or new vulnerable appear to be better educated, more urban, and have better access to basic services relative to the existing poor. This profile should position them to regain their footing quickly as the pandemic subsides.

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With the international communitys help, LAC countries must work to ensure a sustained recovery for the poor. For starters, expanding vaccine access will give several countries the upper hand in the ongoing tug-of-war between sluggish vaccination rates and new outbreaks or variants. The regions poor, prone to higher infection risks because they tend to be employed in informal, in-person, and close-proximity jobs, stand to benefit from such efforts.

More broadly, a vulnerability-based approach to understanding and tackling poverty is needed. The uneven distributional impact of the COVID-19 crisis has confirmed once again that, despite having partly achieved high-income or OECD status, LAC remains highly susceptible to economic shocks, from normal business cycles to extraordinary events such as pandemics and climate-related natural disasters. Because many in LACs middle class are one shock away from poverty or vulnerability, shielding people from such conditions is just as important as lifting people from them.

Addressing LACs numerous and at times overlapping forms of hardship and inequality requires considering all dimensions of vulnerability. Unleashing the regions massive human potential requires a foundation of inclusive and redistributive policies. Social protection systems, combined with data-driven risk-management and prediction tools, must better target and cover new beneficiaries in need, such as unbanked populations in rural communities.

As countries begin to rethink their medium- to long-term economic strategies, policymakers should work closely with the private sector to facilitate and broaden access to the resources needed to generate resilient, self-sustaining growth, such as digital connectivity, education, high-quality and formal employment, and credit. Continued technical and financial assistance from multilateral organizations like the World Bank can play an important role in supporting this process.

Finally, LAC policymakers across the political spectrum should take stock of the rapidly evolving sentiments in society. The pandemic has aggravated popular frustration and polarization, and a number of key elections are on the horizon. In several countries, reaching a consensus on the path forward could be difficult. The stakes are high: not only accelerating an inclusive regional recovery, but also safeguarding the conditions for continuous macro- and micro-improvements in the post-pandemic future.

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Building an Inclusive Recovery in Latin America and the Caribbean by Carlos Felipe Jaramillo, Otaviano Canuto and Pepe Zhang - Project Syndicate