How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
In a time of geopolitical upheaval, few parts of the world have weathered greater social and economic upheaval than Latin America. Despite accounting for just eight percent of the world’s population, Latin American countries have suffered more than 40 percent of all deaths from COVID-19; during the first year of the pandemic, they also experienced their greatest economic contraction in more than a century. Then, just as the region was making an economic rebound, it was hit by the twin shocks of Russia’s war in Ukraine and a global inflation crisis. As of October 2022, average inflation across the region was approaching 15 percent—about triple the level of Asia’s and one-third higher than sub-Saharan Africa’s—while public debt levels have soared to more than 70 percent of regional GDP.
That Latin America’s latest turmoil is driven in large part by far-flung events may seem surprising. For much of the past three decades, Latin America has mostly remained on the margins of major geopolitical conflicts, from the wars in Afghanistan, Iraq, and Syria to China’s growing ambitions in the Indo-Pacific region. Distance, both geographic and political, has tended to keep the region apart and consumed instead by its own internal issues, such as sky-high inequality, violent crime, and corruption.
But now, events halfway around the world are roiling Latin America’s economies—and, by extension, its politics—more than at any other time since the end of the Cold War. The prolonged economic slowdown of China, price shocks in the wake of Russia’s war on Ukraine, and interest-rate hikes by the U.S. Federal Reserve and other leading central banks have created a perfect storm of macroeconomic pressures on the region’s already stagnant economies. Latin American democracies are not in peak health, either. Until now, only Nicaragua and Venezuela have joined Cuba in becoming full-fledged dictatorships. But El Salvador, Guatemala, and Mexico are gripped by democratic backsliding, and Brazil was headed in the same direction before voters threw out right-wing populist Jair Bolsonaro in October. Meanwhile, Argentina, Ecuador, and Panama have been beset by large-scale unrest.
No wonder some commentators across the region worry about a repeat of Latin America’s so-called lost decade of the 1980s. Then, just like today, mounting debt, price shocks from outside the region, and sharp interest-rate hikes threw Latin America’s economies into a tailspin, casting more than 20 million people into extreme poverty and erasing decades of rising standards of living. Although most of the region’s fledgling democracies survived, several hung on only by a thread, and it took over a decade for many economies to recover. This time, the outcome could be worse: many younger Latin Americans have had enough with democratic dysfunction, and although the region’s central banks are better equipped to respond to the crisis, few voters seem willing to put up with the painful side effects of curbing inflation and debt. If governments across the region are unable to correct course without causing further social upheaval, the region could well face a new lost decade. And although it may prove less economically damaging, it could be even more politically destabilizing than its predecessor—with consequences that could sooner or later reach the United States.
Paradoxically, until the current crisis, many Latin American governments seemed to have conquered the debt and inflation problems that precipitated the first lost decade. In the 1980s, the region was emerging from an unprecedented democracy wave, with countries such as Argentina, Brazil, and Peru transitioning from authoritarian rule to open elections. Yet by the decade’s close, the future looked bleak. By 1983, governments across the region, in a bid to sustain state-led industrialization, had racked up nearly as much debt as the rest of the world’s developing economies, only at riskier terms and largely in dollars. And because of the Fed’s huge interest-rate hikes, which Fed Chair Paul Volcker had implemented to curb domestic U.S. inflation, many of these governments were unable to service their debts. When Mexico defaulted in 1982, it marked the beginning of a wave of similar defaults across the region, and Argentina, Brazil, Bolivia, and Peru experienced hyperinflation.
To dig themselves out of this abyss, Latin American governments paid a high economic and social price. With nowhere else to turn, many governments entered financing agreements with the IMF and the World Bank that required them to make sharp spending cuts and curb public debt. At the same time, they gave newly independent central banks free rein to take on runaway prices by raising interest rates. This strong medicine worked—by the end of the 1990s, average inflation across the region had fallen from 21.8 percent, in 1990, to just 3.5 percent, in 1999—but the side effects were traumatic. Much of the region plunged into a prolonged recession and per capita GDP declined.
In 1992, populist outsider President Alberto Fujimori took advantage of Peru’s economic chaos to close Congress and install a competitive authoritarian regime. Over the course of the same decade, Venezuela’s decades-old party system collapsed—creating an opening for populist strongman Hugo Chávez. The pain of economic reform set the stage for leftist populists such as Evo Morales, who became president of Bolivia in 2006, and Rafael Correa, who came to power in Ecuador in 2007—both of whom took up the banner of opposition to neoliberalism.
Still, for all the pain that came alongside them, the reforms that helped end the lost decade cemented two hard-won achievements: low inflation and a relatively low debt-to-GDP ratio. These became the economic pillars on which the region’s democracies have rested ever since. Latin America was to some degree shielded from global events such as the 2008 financial crisis, and it benefited from China’s rapid growth. During the first decade of this century, Chinese demand fueled a commodity boom in countries such as Bolivia, Brazil, Chile, and Peru that slashed poverty rates across the region and grew the ranks of the middle class by 63 million. Given the relative economic stability the region had achieved, few expected Latin America to find itself once again in dire macroeconomic straits.
In fact, by the 2010s, pressure on many Latin American economies was beginning to build. First, by the middle of the decade, waning demand in China, South America’s top trading partner, lowered prices for the region’s commodity exports. By mid-decade, growth rates had declined sharply in Argentina, Bolivia, and Brazil, and taken a hit in Peru and Chile, as well. Then came COVID-19, bringing with it a combination of tough lockdowns and supply chain disruptions that stopped the region’s economies in their tracks. Most countries rolled out emergency social assistance to buffer against the recession and prevent widespread hunger, but given Latin America’s notoriously low tax revenues, this emergency safety net came at a steep cost, thrusting governments deep into debt. Meanwhile, extreme poverty reached a 27-year high. Nonetheless, as commodity prices began to rebound in 2021, the region began to look forward to a partial post-pandemic economic recovery.
But these hopes have been dashed over the past year as supply-side factors, such as the continued disruptions of China’s “zero-COVID” policy, and the effects of pandemic stimulus spending have driven inflation to some of the highest levels the region has seen in decades. Just as concerning—and eerily reminiscent of Latin America’s original lost decade—have been the effects of tight monetary policy. The region’s central banks beat the Fed to the chase, raising interest rates earlier and faster than in other parts of the world in a bid to tame inflation, even though it meant decelerating already slow growth: in October, the IMF projected that inflation in Latin America would finally start to dip in 2023. But with the Fed undertaking a campaign of its own, investors have been scared away from risk-taking, and capital inflows to Latin America have dramatically slowed.
Many Latin Americans say they would give up elections for guarantees of basic incomes and services.
Moreover, Fed rate hikes have made it much costlier for some Latin American governments to service their dollar-denominated debt, which as of 2021 accounted for more than a third of Colombia’s public debt and more than half of Chile’s and Argentina’s. Meanwhile, the Inter-American Development Bank expects average debt-to-GDP ratios to continue to rise across the region at least through 2024. This situation leaves governments and their finance ministers with few palatable options: either they can slash public spending at the risk of further thinning already insufficient safety nets or go deeper into fiscal crisis.
Despite these worrying trends, some observers argue that a rerun of the lost decade is unlikely. They point to the region’s now independent central banks and their proactive approach to monetary policy. They note that the U.S. economy is now itself overleveraged, making it unlikely that the Fed will ratchet up interest rates to the double-digit levels of the early 1980s. These assumptions may be true. Unfortunately, they do not mean that Latin America is out of the woods yet, for one simple reason: today, the political situation is increasingly volatile, and democratic institutions in many countries seem more fragile than at any other point in the past three decades.
In the 1980s, most of the region’s democracies were young. For Latin Americans at the time, not only was the experience of bloody military dictatorships still fresh but many of them had taken personal risks to bring down those regimes. Majorities in most countries were prepared to tolerate democratic dysfunction, and even some degree of economic pain, without turning against democracy itself.
Far fewer seem likely to put up with such turmoil today. Already, there are signs in many countries that democratic institutions could be vulnerable in a prolonged crisis. Take the 2021 Americas Barometer survey: in all but four countries in the region, a majority of respondents expressed dissatisfaction with their democracies and also said that they would be willing to give up free elections for guarantees of basic incomes and services. At the same time, polls show a growing generational gap among Latin Americans in their views of democracy, with millennials and Generation Z far less likely to be satisfied with democracy than their parents. This is the second-largest such gap of any region in the world.
Until now, the wave of discontent has mostly been channeled through the ballot box. Tellingly, incumbent presidents’ parties have lost the last 15 presidential elections in the region. Brazil is no exception. In October’s presidential election, the incumbent, Bolsonaro, lost to the leftist ex-president Luiz Inácio Lula da Silva. Encouragingly, Bolsonaro did not prove able to undermine the impendence of the country’s courts or electoral system in his four years in power and his calls to overturn the election results seem unlikely to succeed.
But in other countries, popular discontent over inflation and government austerity measures has started to take on more destabilizing forms. In Panama in July, price increases incited some of the largest antigovernment protests since the fall of dictator Manuel Noriega, in 1990. Similar mass protests have paralyzed the capitals of Ecuador and Argentina. And in early October, when Haiti’s prime minister announced cuts in fuel subsidies, it set off a new wave of destabilizing violence. In fact, these protests have built on a wave of mass protest against government policies and thin social safety nets that has been growing over the past decade. As was the case in Brazil in 2013 and Chile in 2019, when governments make even what appear to be small cuts to subsidies or small increases in public service fees, it may set off destabilizing unrest. If this pattern continues to grow, it could lead to chronic instability, undermine governability, and—in a worst-case scenario—lead to democratic breakdowns in countries already teetering on the edge.
Of course, there’s one other big difference between the region today and in the 1980s. During the lost decade, mass migration to the United States was just beginning, fueled almost entirely by citizens of Mexico, the Caribbean, and northern Central America. In the decades since, however, migration flows have spiked, with people from across the region gambling on reaching the United States. In the first nine months of 2022 alone, U.S. border control agents have logged more than one million encounters with Latin American migrants at the southwestern border—and for the first time, the number of encounters with people from northern Central America and Mexico was exceeded by encounters with Latin Americans from farther away—namely, Venezuelans, Cubans, Haitians, and Nicaraguans. If economic stagnation continues, those numbers may go much higher.
If governments in the region could strike the ultimate balancing act—cutting debt and inflation without dismantling social safety nets—they might just be able to dodge a new lost decade. But that would require a huge amount of resources. With public budgets already stretched thin, a global economic recovery out of sight, and U.S. policymakers focused elsewhere, those resources seem unlikely to materialize anytime soon. In the 1980s, Latin America lost a decade of economic stability without losing democracy. But if the 2020s becomes a new lost decade, all bets are off.