Latin America’s poverty trap

It is difficult to envision how Argentina, and Latin America more broadly, will return to a path of growth and prosperity after reading the latest Social Panorama for Latin America report, put together by the United Nation’s Economic Commission for Latin America and the Caribbean (CEPAL). Broadly speaking, the region faces a plethora of threats that have conspired to overturn a decade and a half of poverty reduction, as the global economy has cooled and governments across Latin America have attempted to implement policies that aim at deficit reduction.

During the glory days of what Kirchnerites like to call the “won decade” (la década ganada), 66 million Latin Americans were lifted out of poverty, which fell aggressively from 45.4 percent in 2002 to 27.8 percent in 2014. Extreme poverty was reduced from 12.2 percent to 7.8 percent as a commodities super-cycle fuelled by Chinese and South East Asian demand raised prices for the region’s exports, which consisted of primary goods of course. This, and the help of a growing safety net and retirement system financed by the state, helped inequality drop steadily in every country of the region with the exception of Costa Rica, which held steady, meaning a one-percent annual reduction in the Gini coefficient as a whole. As a result, Latin America’s middle classes have grown.

“Inequality is inefficient,” reads a section of the report which highlights a strong correlation between higher productivity and lower levels of economic inequality. “Equality is efficient, first because it generates m o r e inclusive institutions, w h i c h i n turn increases opportunities to better take advantage of the creative and productive capacities of a nation’s population as a whole, strengthening markets and therefore increasing internal demand through the expansion of purchasingpower for large sectors of the population.”

While this is a good thing for president-elect Alberto Fernández — particularly as Argentina boasts the lowest levels of inequality in the region — the real problem is that poverty is on the rise once again, and it’s not just the fault of President Mauricio Macri’s disastrous management of the economy. The main problem is a sustained decline in wage income coupled with cuts to the social safety net. Brazil and Venezuela are the main culprits, but Argentina has also fallen prey to rising poverty since 2018. As a region, poverty rose to 30.1 percent by the end of 2018, meaning some 185 million Latin Americas are currently poor, with 66 million of them in conditions of extreme poverty. And these situations are even worse among rural populations, women and children, Afro-descendents and indigenous people, and those in the informal labour market.

As has been mentioned several times in this column, Argentina is an extremely polarised nation with its political economy marked by what has come to be known as ‘la grieta.’ The obvious, and incorrect, reading would be that the wave of leftist populists who governed the region for the majority of the aforementioned glory years were responsible for a momentous reduction in poverty in what continues to be the world’s most unequal region. Yet, that’s only part of the story. While the Kirchners, Lulas, Correas and the Evos of the continent did have a predilection for income distribution, and did put in place policies that helped support those worse off, they also created the conditions for a large, corrupt and inept bureaucracy to control the state, while failing to put in place reforms to make the region more productive. The end of the populist cycle, marked by Macri’s surprise 2015 victory over Cristina Fernández de Kirchner’s puppet, Daniel Scioli, saw a change of power when the underlying cycle had already turned. While Macri’s incompetence at managing the Argentine economy is evident today, he did receive a ticking timebomb.

And the situation is worsening. Climate change and the increase in natural disasters is a consistent and growing threat for the region, particularly those most vulnerable. Another major issue is migration, which has accelerated and brought with it a series of new and unprecedented challenges, including the risk for increasing inequality. We are also in the midst of a technological revolution that is changing the topography of labour quicker than we can adjust to it. Automatisation and the need for a highly skilled workforce could exacerbate the disadvantage of those at the bottom of social pyramid.

In Argentina it has become popular to speak of a “social pact” among society’s different sectors to break the inflationary spiral and jumpstart production. Apparently, CEPAL’s analysts are in line with Alberto Fernández’s economic team, as they highlight the necessity of a “social and fiscal pact in the region to move toward a new relationship between the State, society and the market under a logic of equality and sustainable development.” The pact— which CEPAL first called for in 2010 — would aim at putting a series of priorities front and centre, beyond polarisation. This, and the need for a continued expansion of the safety net across the region, are key elements in promoting the conditions for growth in Latin America for CEPAL.

It isn’t entirely clear how Latin America’s governments will be able to finance increased social spending — just ask Macri — in the context of large fiscal deficits. It’s also difficult to fathom how the region can gain productiveness and global competitiveness through a social pact, even if it’s a good start (if indeed it works). Latin America is a region of great natural wealth, yet it is in a tough spot with regards to future prospects.