The Covid Political Disruption That Awaits in Latin America

By John Price  Posted October 8, 2020  In Business Trends & Strategy, Coronavirus Resources, Eco-political analysis

What politicians across Latin America failed to grasp when they resorted to absolute lockdowns to fight the spread of COVID was how such measures would further societal divisions, sowing the seeds of their own demise. From 2003 – 2013, Latin America made great strides in reducing poverty and narrowing the world’s worst income divide. Since the end of the commodity super-cycle in 2014, poverty grew gradually in some markets but the region’s middle class stood its ground. Experts believe that five months of lockdowns (still ongoing in some countries) has wiped out more than half of the progress made in reducing poverty in Latin America over the last two decades. The backlash that awaits will rewrite the political map in several jurisdictions. 

The Wall Street Journal refers to the economic rebound underway as K-shaped, referring to two diverging paths ahead between the haves and have nots. What divides the world today between those who can survive, if not thrive versus those who are slipping behind is the digital divide. For businesses (and their staff) that are digitized or can be moved online, surviving lengthy lockdowns is viable. For businesses that are inherently off-line in nature (street markets, corner stores, restaurants, bars, cinemas, hotels, airlines, etc.), COVID-19 lockdowns are a threat to their survival and the employment of millions.

For 60% of working Latin Americans who toil in the informal economy, lockdowns are a triple threat: your personal income can drop to zero, no institutionalized safety net exists to comfort your fall, and you lack a bank account and debit card so engaging in e-commerce is a challenge. Even if governments have the resources and desire to help informal workers, with few exceptions they lack the infrastructure to deliver such transfers to them. In 2020, the exceptions have been Brazil, Chile and Peru, who mounted impressively funded and executed direct transfer programs to the unbanked, rescuing thousands of businesses from failure and keeping millions of households fed.

In contrast, high levels of employment informality, disruptive lockdowns and underfunded counter-cyclical measures in Argentina, Mexico and Colombia (and many other countries) will worsen income distribution, putting political incumbents at risk. Some investors will welcome political upheaval in Argentina and Mexico where today’s populist administrations pose an existential threat to business. But for Colombia, a political pivot towards populism would be unchartered territory for a country that has endured more than a century of centrist politics largely run by established parties.

As the presidential approval polling trends indicate, Presidents Duque (Colombia) and Fernández (Argentina) amassed impressive approval gains early during their strict lockdown measures. Both countries were applauded for effectively containing the virus early on. However, as lockdowns dragged on and incomes plummeted by close to 50% in lower income households, the COVID healthcare crisis was eclipsed by an economic one and voters became frustrated. In August polling for the next Presidential elections in Colombia, slated for 2022, the left-wing candidate Gustavo Petro, had 32% support versus the #2 candidate with 19%.

In Chile, the Q4 riots and protests devastated support for Piñera but the Chilean government’s rapid, generous and sensible response to COVID rebuilt public support for the government, even for the maligned President himself.  Support has since dropped from the high of 44% reached in May but remains well above pre-COVID levels thanks largely to an effective transfer of government support to those who truly need it.

The political tea leaves are more difficult to read in Peru. Vizcarra, already popular before COVID reached remarkably high approval ratings at the early stages of what were very strict lockdowns. Support has waned somewhat but the President remains the most popular politician among voters who have outright disdain for the legislative branch of government.  

The region’s leading populist, AMLO, was able to ride the COVID polls to 60% approval rating in spite of being criticized for not taking the virus seriously at first. Some are confounded by his continued strong approval ratings, in spite of a 13% plunge in consumer spending projected this year and a 10.5% GDP drop. The newspaper toting classes are alarmed by AMLO’s gradual erosion of the 4th estate and other necessary democratic institutions but the President understands better than most how to win the class warfare politics of Mexico. Under COVID, he has done this by allowing lockdowns to lift faster than many other countries and by reminding voters on a regular basis of the transgressions of the last administration, possibly the most despised in modern Mexican history.

The biggest post-COVID winner may be President Bolsonaro. Back in April, he was ridiculed in the press, both in Brazil and abroad for his cavalier attitude towards the COVID medical crisis. Of the six largest economies in the region, his was the only approval rating to drop as lockdowns began, precisely because many felt the measures advocated by the national government were too lax. But at the end of the day, Latin America is no different than any other part of the world – voters vote with their pocketbooks. Brazil’s administration, with congressional support, delivered economic relief to all Brazilians. The central bank targeted an incredibly low SELIC rate of only 2%, unheard of in modern Brazilian history. The government passed spending initiatives that, on a % of GDP will eclipse the US and many European fiscal efforts. Brazil’s highly innovative banking sector helped distribute government transfers to all Brazilians and in doing so added almost 50 million consumers to the banked population.

At the end of the day, the healthcare tragedy of COVID will be felt across the region, but the COVID economic crisis will vary from country to country. That harsh reality will prove very disruptive in 2021 and 2022 elections.

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