Off the beaten path

Having hit Latin America and the Caribbean harder than any other region in the world, the coronavirus pandemic has brutally exposed the region’s long-standing structural problems. The pandemic has had a profound effect on a region already reeling from the turmoil of massive protests against entrenched development paradigms. Neither the neoliberal nor the left-wing populist paradigm seems tenable anymore. It’s unclear exactly which development path the countries will take once the shock of the crisis subsides, especially since many are deeply polarized.

In 2019, long-standing resentment over severe social disparities culminated in massive waves of violent protest against governments and political elites, particularly in Chile, Colombia, Ecuador and Panama. The leadership in these countries had held on to established models of economic and social order for (too) long and proved less and less able to deliver on the promise of prosperity. The coronavirus pandemic and its effects have reinforced these political divisions, triggering open dissent over how to manage the crisis. At least in their current form, the two economic and sociopolitical models that have long shaped the region’s development – the “neoliberalist” paradigm embodied by Chile and the left-wing populist “Bolivarianism” seen in Venezuela – appear to have exhausted themselves.

The coronavirus pandemic has exposed Latin America’s oft-cited economic structural weaknesses – extreme inequality, weak economic productivity and fractured social systems. However, the nadir reached in the 2022 edition is the outcome of a steady downward trend that has been underway for more than a decade. The diminishing ability to develop viable problem-solving strategies is also reflected in the region’s governance scores. In terms of battling the pandemic, hardly any government in the region has demonstrated consistently sound crisis management, though few reacted as poorly as the Brazilian government under President Jair Bolsonaro or the Nicaraguan regime under President Daniel Ortega.

Political transformation

New battle lines

Chile has become the region’s most striking example of an acute crisis of representation. The fact that the October 2019 revolt erupted over a seemingly marginal issue – a hike in metro fares in Greater Santiago equivalent to some €0.03 – sheds a telling light on the depth of social and political divisions in the area. Chilean political elites failed to recognize the intensity of the alienation felt by large segments of the population. The ongoing erosion of the country’s party system (–3 points since the BTI 2010), which reflects the divisions present in Chilean society, has accelerated in the wake of the May 2021 elections for the Constituent Assembly.

However, the real significance of the events in Chile lies in the fact that the model of neoliberalism has been overtaken by its own history. Whereas Chile takes orderly steps toward instituting a new constitution, most other democracies in Latin America have limited capacity to channel such fundamental conflicts. Aside from the already heavily polarized countries, such as Argentina, Brazil and Mexico, other seemingly stable governments faced protests that were accompanied by massive violence and led to reforms. For example, a broad-based protest movement in Colombia resulted in a fault line entirely different from the one that the country – which has suffered decades of guerrilla warfare – had known to date: the state versus its protesting citizens. In April 2021, the protests forced the government to abandon a tax reform.

In 2019, Ecuador saw widespread protests, overshadowed by deaths, that forced then-President Lenín Moreno to roll back a cut in gasoline subsidies. In Peru, conflicts between the executive and the Congress culminated in the impeachment of President Martín Vizcarra in November 2020, which was followed by mass protests against the country’s corrupt political elites. The conflicts between the Lima-based “official” elite and the rural indigenous groups of Perú profundo came to a head in the course of the 2021 elections, exposing the deep divide between the two, which awaits a solution under the leadership of the newly elected left-leaning president, Pedro Castillo. In Panama, it has particularly been the frustration of youths, who see few future prospects in a system characterized by horrendous corruption and inequalities, that has led some to adopt anti-system attitudes. In deeply divided Bolivia, neither Evo Morales’ forced resignation nor the comeback of his MAS party has done much to narrow the gaps between the various political camps.

In the region’s three heavyweights, polarization is mixed with a populist-driven effort to dismantle democracy: In Argentina (–0.45 points), former President Cristina Fernández de Kirchner is shrewdly leveraging her – technically subordinate – role as vice president to rigorously advance her agenda in the wake of the Peronists’ victory in the 2019 elections. Plagued by a series of investigations for corruption, she has been denouncing the judiciary for waging “lawfare” against her and other Peronists. Brazil (–0.35) experienced the feared erosion of democracy under President Bolsonaro as well as a wave of hate speech, discrimination, human rights violations, and attacks on the press and judiciary. Finally, Mexico recorded only minor losses in nominal terms, yet a loss of 0.10 points is still enough for it to have been downgraded to a “highly defective” democracy. President Andrés Manuel López Obrador, who is trying to initiate Mexico’s “fourth transformation,” has little faith in the country’s established institutions. Though this distrust is not entirely unfounded, his populist approach is only further undermining the already weakened bodies tasked with monitoring government accountability.

Economic transformation

Economic recession and stagnant sociopolitical development

Whereas the coronavirus pandemic has had a rather indirect impact on political transformation, it has directly affected economic and social developments across Latin America. By mid-2021, the region, which comprises 8.4% of the world’s population, recorded more than 1.26 million deaths, accounting for 32% of all cases worldwide. In addition, Latin America suffered a massive decline in gross domestic product in 2020, which amounted on average to 7%. Though this varies considerably across the region, Latin America’s economies have been losing steam for more than a decade, and the threat of social decline is another cause of the waves of protest that have emerged.

Clearly, the model of development involving a passive integration into the global economy is for the most part no longer viable. This is because both the recession triggered by the coronavirus and the expected recovery are taking place under adverse conditions that remain unchanged: From Mexico to Brazil, we find countries caught in the middle income trap. Almost all of them remain dependent on resource-driven growth, which relies on cheap labor and capital, and took only sporadic steps toward improving productivity and innovation. Though the circumstances differ, this also applies to Cuba, where the government of Miguel Díaz-Canel has initiated far-reaching reforms, although they may be coming too late to prevent major tension down the road.

Argentina (–0.68) and Panama (–0.46) were among the countries showing the largest losses in this regard. Whereas the pandemic hit Panama hard because of its impact on the country’s international ties and traffic through the Panama Canal, Argentina suffered because of the ways in which the pandemic exacerbated the country’s ongoing domestic crisis. Constantly teetering on the brink of national bankruptcy and with no hope of achieving creditworthiness, the government undermined itself by letting internal feuds over economic and fiscal policy prevent it from making any headway on these issues before stumbling into the 2021 election year. In the longer-term trend since 2008, Argentina has also registered one of the biggest losses, along with Mexico (both –1.07) and Brazil (–1.25). Only Venezuela (–2.43) and Cuba (–1.46) have fared worse.

These developments have left their mark on the level of socioeconomic development achieved across the region. The average regional score has fallen from its 2010 peak of 5.14 to 4.57. There is a vicious circle in which multiple patterns of inequality are limiting the development potential of broad sections of the population and thereby curbing the potential for economic growth, which in turn further cements inequality. Poor performance in terms of fiscal stability (–1.48 points on average since the BTI 2012) and welfare regimes demands that a new course be set. Even countries like Chile are grappling with immense social inequalities. However, there was some good news to be found in the fact that anti-poverty programs already in place in some countries were able to be used as a vehicle for pandemic aid measures. Examples include the Dominican Republic and Brazil, where the Bolsa Família social welfare program established under former President Lula da Silva has proved relatively effective.

Governance

Bad governance

The average quality of governance in Latin America and the Caribbean has also fallen again, with the current downturn being more clearly attributable to democracies, particularly Brazil, El Salvador and Argentina. In Brazil, President Bolsonaro has further deepened the divide between left and right, which has grown significantly since 2013. Unsurprisingly, those aspects of governance in the country that are associated with consensus-building and cooperation have been further weakened. Moreover, the government’s credibility has suffered heavily, due to its isolationist stance, disastrous environmental policy and catastrophic management of the pandemic.

In El Salvador, which faces an entirely different set of political circumstances, we observe patterns of populist-authoritarianism underway since the 2019 national elections. The simple messages of elected President Nayib Bukele– ambitious government infrastructure measures, improved anti-corruption policies and youthful enthusiasm – were spread by his creative use of social media, which has also characterized his governing style since he took office, along with impulsiveness and a disdain for constitutional procedures and established parties. This has led to his government’s underwhelming performance in terms of consensus-building, which, together with unclear prioritization and insufficient policy coordination, are largely to blame for the decline in El Salvador’s governance score (–0.91).

In Argentina (–0.58), following the polarized 2019 election campaign and the swinging of the pendulum back to the Peronists, it has become clear that reaching basic agreements among the political camps is a mere illusion. In fact, the irreconcilable attitude of Vice President Fernández de Kirchner's “kirchneristas” is driving a wedge not only between Peronists and non-Peronists, but also between the various Peronist factions. In addition to having a negative impact on the government’s steering capability and policy coordination, this dynamic has seriously hampered efforts to combat corruption – a battle in which the vice president, who is herself suspected of corruption, plays a key role.

Conversely, Uruguay, Chile and Costa Rica are ranked 2nd, 4th and 5th, respectively, in the overall BTI ranking. In all three countries, these rankings testify to the existence of evolved structures of governance, even if future political developments are somewhat uncertain in the case of Chile. However, the example of Uruguay shows that a change of government from the leftist Frente Amplio to the conservative Lacalle Pou government need not result in major tension, as is the case in most other countries. In Costa Rica, on the other hand, President Carlos Alvarado’s government has proved capable of achieving important goals, such as enacting the long-needed reforms for a sustainable fiscal policy.

Also noteworthy has been the pandemic response in the Dominican Republic. Overall, the country is (so far) emerging from the crisis relatively unscathed, which is a testament to the government’s prudent policies and ability to carry out a well-coordinated, multistage response plan that has included the procurement of vaccines.

Outlook

Wanted: inclusion, the rule of law, consensus-building

Latin America is at a crossroads. However, unlike the choices faced in the 1980s and 1990s, there is no blueprint to follow, such as that of the neoliberal script, which was thought to represent the only way forward back then – even though there were alternatives, as the example of Uruguay shows. In any case, post-neoliberal arrangements are unlikely to materialize if stronger efforts are not made to broaden economic inclusion. Reform efforts that aim to curtail the informal sector, expand or restructure mostly fractured education and health sectors, incentivize political participation, and create more representative opinion and consensus-building processes – such as the reform of legislation regulating political parties in Peru – are nothing new, but they are essential milestones to progress.

As BTI authors have always stressed, this also applies to the Achilles’ heel of Latin American democracies: the rule of law and the elimination of corruption and clientelism. Conversely, so-called “post-socialist” arrangements are unlikely to dispense with the need to expand their market competition, as the case of Cuba shows. Whatever the circumstances, changing a country’s directional path requires extraordinary governance capacities, which in turn demand a high capacity to learn and an equally robust ability to build consensus.

Those countries that have endured crises accompanied by violence stand a relatively good chance of making this a reality (though whether this is due to or despite their experiences with violent upheavals is worth debating elsewhere). In addition to Chile, the prospects for such change are (still) open in Colombia, Ecuador, Panama and Peru. The Dominican Republic and Paraguay are two other candidates, though both must contend with deep divisions at home. For now, the prospect of striking out on a new path seems unrealistic wherever heavily polarized societies make it difficult to achieve consensus, as is the case in Argentina, Bolivia, Brazil and Mexico.