Under the Latin American Volcano

Most of Latin America is still far from the horrific conditions prevailing in Venezuela, where output has fallen by a staggering 75% since 2013. But, given the ongoing humanitarian catastrophe there, and the specter of political instability elsewhere, investors should not take a sustained economic recovery for granted.

CAMBRIDGE – The current disconnect between market calm and underlying social tensions is perhaps nowhere more acute than in Latin America. The question is how much longer this glaring dissonance can continue.

For now, the region’s economic data keep improving, and debt markets remain eerily unperturbed. But seething anger is spilling out into the streets, particularly (but not only) in Colombia. And with the rate of new daily COVID-19 cases in Latin America already four times higher than the emerging-market median, even as a third wave of the pandemic sets in, the region’s 650 million people face an unfolding humanitarian disaster.

As political uncertainty rises, capital investment has stalled in a region already beset by low productivity growth. Even worse, a generation of Latin America’s children have lost nearly a year and a half of schooling, further undermining hopes of achieving educational catchup with Asia, much less the United States.

For Cuba, Russia, and China, which already have a beachhead in Venezuela, the pandemic presents an opportunity to make further inroads. Markets seem relieved that the apparent winner of Peru’s presidential election, Pedro Castillo, a Marxist, appears to have at least a couple of mainstream economic advisers, but it remains to be seen what real influence they will have.

Moreover, Latin American economic data so far this year are good only in the sense that they are not as awful as in 2020, when output fell by 7%. In April, the International Monetary Fund forecast that the region’s GDP would grow by 4.6% in 2021; more recent estimates are closer to 6%. But in per capita terms – now understood as a better way to measure recovery from deep economic crises – most Latin American economies will not return to pre-pandemic levels until well into 2022, or beyond.